Explaining to the Kleptocrats on Capitol Hill that Tax Havens Should Be Emulated, not Persecuted

Since I just left Monaco and am now in Geneva, this is an appropriate time to extol the virtues of so-called tax havens.

The name’s Bond….James Bond

But I don’t merely say nice things about low-tax jurisdictions when I’m in friendly environments.

I believe in swinging my sword in the belly of the beast.

That’s why I recently defended tax havens and tax competition for the fiscal heathens who read the New York Times.

In an even bigger display of futile optimism, I also just explained the benefits of tax competition, fiscal sovereignty, and financial privacy for the kleptocrats in Congress.

Here’s some of what I wrote for The Hill, starting with the obvious point that it is preposterous to blame tax havens for the financial crisis.

When the financial crisis hit, politicians from high-tax nations didn’t let the crisis go to waste. Acting through the G-20, they launched an attack on so-called tax havens, asserting that “hot money” from the offshore world somehow had caused the banking system to become unstable.  This campaign against low-tax jurisdictions made no sense. Nobody in the Cayman Islands or Monaco was responsible for the Federal Reserve’s easy money. Nobody in Panama or Singapore had anything to do with the corrupt system of Fannie Mae/Freddie Mac subsidies.

I then explained that tax havens once again are being attacked, though in this case multinational corporations are the main victims of a new scheme by the parasitical bureaucrats at the OECD.

So-called tax havens will suffer collateral damage, though, since big firms use them as very desirable platforms for a significant chunk of cross-border economic activity.

Tax havens are being attacked again… Funded with American tax dollars, the Organization for Economic Cooperation and Development (OECD) published a report on “Addressing Base Erosion and Profit Shifting,” (BEPS) and will follow up in a few months with specific recommendations.  This new OECD scheme is targeting multinational companies for a big tax hike, probably by requiring global tax returns, but that means tax havens are in the cross hairs because their pro-growth tax policies make them attractive locations for cross-border economic activity. Indeed, the OECD specifically has complained that “small jurisdictions act as conduits, receiving disproportionately large amounts of Foreign Direct Investment compared to large industrialised countries and investing disproportionately large amounts in major developed and emerging economies.” …its new campaign isn’t just targeting small tax havens, but will also undermine the relatively attractive fiscal systems in nations such as Ireland, Hong Kong, Switzerland, Slovakia, Singapore, Estonia, and the Netherlands. The burden of this will fall not on companies, but on workers, consumers, and shareholders.

I close with a warning that tax havens and tax competition are one of the few restraints on the greed of the political class. We need to preserve these liberalizing forces if we want to protect ourselves from even worse fiscal policy.

…anti-tax haven demagoguery is perfectly acceptable in political circles since it is seen as expanding the power of government over taxpayers.  The real issue we should be addressing is whether we need some sort of external constraint to protect us from fiscal crises that are triggered by the overspending and overtaxing of the political class.  For a couple of decades following the Reagan and Thatcher tax cuts, governments around the world have been forced by tax competition to lower tax rates, reduce double taxation of saving and investment and reform their tax system.  Defenders of the welfare state and proponents of class-warfare tax policy have resented this liberalizing process and grab any opportunity to demonize tax havens, particularly since these jurisdictions have strong human rights laws that protect the financial privacy of investors.

For further information, I highly recommend the writings of Allister Heath and Pierre Bessard.

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A Tax Haven Primer for the New York Times

I could only use 428 words, but I highlighted the main arguments for tax havens and tax competition in a “Room for Debate” piece for the New York Times.

I hope that my contribution is a good addition to the powerful analysis of experts such as Allister Heath and Pierre Bessard.

I started with the economic argument.

…tax havens are very valuable because they discourage anti-growth tax policy. Simply stated, it is very difficult for governments to impose and enforce confiscatory tax rates when investors and entrepreneurs can shift their economic activity to jurisdictions with better tax policy. Particularly if those nations have strong policies on financial privacy, thus making it difficult for uncompetitive high-tax nations to track and tax flight capital. Thanks to this process of tax competition, with havens playing a key role, top personal income tax rates have dropped from an average of more than 67 percent in 1980 to about 42 percent today. Corporate tax rates also have plummeted, falling from an average of 48 percent to 24 percent. …Lawmakers also were pressured to lower or eliminate death taxes and wealth taxes, as well as to reduce the double taxation of interest, dividends and capital gains. Once again, tax havens deserve much of the credit because politicians presumably would not have implemented these pro-growth reforms if they didn’t have to worry that the geese with the golden eggs might fly away to a confidential account in a well-run nation like Luxembourg or Singapore.

Since I didn’t have much space, here’s a video that elaborates on the economic benefits of tax havens, including an explanation of why fiscal sovereignty is a big part of the debate.

My favorite part of the video is when I quote OECD economists admitting the beneficial impact of tax havens.

I also explain for readers of the New York Times that there’s a critical ethical reason to defend low-tax jurisdictions.

Tax havens also play a very valuable moral role by providing high-quality rule of law in an uncertain world, offering a financial refuge for people who live in nations where governments are incompetent and corrupt. …There are also billions of people living in nations with venal and oppressive governments. To cite just a few examples, tax havens offer secure financial services to political dissidents in Russia, ethnic Chinese in Indonesia and the Philippines, Jews in North Africa, gays in Iran and farmers in Zimbabwe.

To elaborate, here’s my video making the moral case for tax havens.

By the way, many of the issues in this video may not resonate for those of us in “first world” nations, but please remember that the majority of people in the world live in countries where basic human rights are at risk or simply don’t exist.

But that doesn’t mean we shouldn’t worry about the stability of our nations. I close my contribution to the New York Times by warning that the welfare state may collapse.

With more and more nations careening toward fiscal collapse, raising the risk of social chaos and economic calamity, it is more important than ever that there are places where people can protect themselves from bad government. Tax havens should be celebrated, not persecuted.

I didn’t have space to cite the BIS and OECD data showing that most of the world’s big nations – including Germany, the United States, and the United Kingdom – face fiscal problems more significant that Greece is dealing with today. Assuming these nations don’t implement desperately needed entitlement reform, the you-know-what is going to hit the fan at some point. Folks with funds in a tax haven will be in much better shape if, or when, that happens.

For more background information on tax competition, here’s a video explaining the ABCs of the issue.

It’s galling, by the way, that the bureaucrats at the OECD pushing for a global tax cartel get tax-free salaries.

And here’s my video debunking some of the common myths about tax havens.

My favorite part of this video is the revelation that a former John Kerry staffer fabricated a number that is still being used by anti-tax haven demagogues.

And speaking of demagogues misusing numbers, you’ll notice the current resident of 1600 Pennsylvania Avenue has a starring role in this video.

I’ve probably exhausted your interest in videos, but if you’re game for one more, click here to learn more about the Paris-based Organization for Economic Cooperation and Development, a statist international bureaucracy that is active in trying to undermine tax havens as part of it’s efforts to create a global tax cartel to prop up Europe’s welfare states.

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Targeting Multinationals, the OECD Launches New Scheme to Boost the Tax Burden on Business

I’ve been very critical of the Organization for Economic Cooperation and Development. Most recently, I criticized the Paris-based bureaucracy for making the rather remarkable assertion that a value-added tax would boost growth and employment.

But that’s just the tip of the iceberg.

• The OECD has allied itself with the nutjobs from the so-called Occupy movement to push for bigger government and higher taxes.
• The OECD, in an effort to promote redistributionism, has concocted absurdly misleading statistics claiming that there is more poverty in the US than in Greece, Hungary, Portugal, or Turkey.
• The OECD is pushing a “Multilateral Convention” that is designed to become something akin to a World Tax Organization, with the power to persecute nations with free-market tax policy.
• The OECD supports Obama’s class-warfare agenda, publishing documents endorsing “higher marginal tax rates” so that the so-called rich “contribute their fair share.”

Now the bureaucrats have concocted another scheme to increase the size and scape of government. The OECD just published a study on “Addressing Base Erosion and Profit Shifting” that seemingly is designed to lay the groundwork for a radical rewrite of business taxation.

In a new Tax & Budget Bulletin for Cato, I outline some of my concerns with this new “BEPS” initiative.

…the BEPS report…calls for dramatic changes in corporate tax policy based on the presumption that governments are not seizing enough revenue from multinational companies. The OECD essentially argues that it is illegitimate for businesses to shift economic activity to jurisdictions that have more favorable tax laws. …The core accusation in the OECD report is that firms systematically—but legally—reduce their tax burdens by taking advantage of differences in national tax policies.

Ironically, the OECD admits in the report that revenues have been trending upwards.

…the report acknowledges that “… revenues from corporate income taxes as a share of gross domestic product have increased over time. …Other than offering anecdotes, the OECD provides no evidence that a revenue problem exists. In this sense, the BEPS report is very similar to the OECD’s 1998 “Harmful Tax Competition” report, which asserted that so-called tax havens were causing damage but did not offer any hard evidence of any actual damage.

To elaborate, the BEPS scheme should be considered Part II of the OECD’s anti-tax competition project. Part I was the attack on so-called tax havens, which began back in the mid- to late-1990s.

The OECD justified that campaign by asserting there was a need to fight illegal tax evasion (conveniently overlooking, of course, the fact that nations should not have the right to impose their laws on what happens in other countries).

The BEPS initiative is remarkable because it is going after legal tax avoidance. Even though governments already have carte blanche to change business tax policy.

…governments already have immense powers to restrict corporate tax planning through “transfer pricing” rules and other regulations. Moreover, there is barely any mention of the huge number of tax treaties between nations that further regulate multinational taxation.

So what does the OECD want?

…the OECD hints at its intended outcome when it says that the effort “will require some ‘out of the box’ thinking” and that business activity could be “identified through elements such as sales, workforce, payroll, and fixed assets.” That language suggests that the OECD intends to push global formula apportionment, which means that governments would have the power to reallocate corporate income regardless of where it is actually earned.

And what does this mean? Nothing good, unless you think governments should have more money and investment should be further penalized.

Formula apportionment is attractive to governments that have punitive tax regimes, and it would be a blow to nations with more sensible low-tax systems. …business income currently earned in tax-friendly countries, such as Ireland and the Netherlands, would be reclassified as French-source income or German-source income based on arbitrary calculations of company sales and other factors. …nations with high tax rates would likely gain revenue, while jurisdictions with pro-growth systems would be losers, including Ireland, Hong Kong, Switzerland, Estonia, Luxembourg, Singapore, and the Netherlands.

Since the United States is a high-tax nation for corporations, why should Americans care?

For several reasons, including the fact that it wouldn’t be a good idea to give politicians more revenue that will be used to increase the burden of government spending.

But most important, tax policy will get worse everywhere if tax competition is undermined.

…formula apportionment would be worse than a zero-sum game because it would create a web of regulations that would undermine tax competition and become increasingly onerous over time. Consider that tax competition has spurred OECD governments to cut their corporate tax rates from an average of 48 percent in the early 1980s to 24 percent today. If a formula apportionment system had been in place, the world would have been left with much higher tax rates, and thus less investment and economic growth. …If governments gain the power to define global taxable income, they will have incentives to rig the rules to unfairly gain more revenue. For example, governments could move toward less favorable, anti-investment depreciation schedules, which would harm global growth.

You don’t have to believe me that the BEPS project is designed to further increase the tax burden. The OECD admits that higher taxes are the intended outcome.

The OECD complains that “… governments are often under pressure to offer a competitive tax environment,” and that “failure to collaborate … could be damaging in terms of … a race to the bottom with respect to corporate income taxes.” In other words, the OECD is admitting that the BEPS project seeks higher tax burdens and the curtailment of tax competition.

Writing for Forbes, Andy Quinlan of the Center for Freedom and Prosperity highlights how the BEPS scheme will undermine tax competition and enable higher taxes.

…the OECD wants to undo taxpayer gains made in recent decades thanks to tax competition. Since the 1980′s, average global income taxes on both individuals and corporations have dropped significantly, improving incentives in the productive sector of the economy to generate economic growth. These pro-growth reforms are the result of tax competition, or the pressure to adopt competitive economic policies that is put on governments by an increasingly globalized society where both labor and capital are mobile. Tax competition is the only force working on the side of taxpayers, which explains the organized campaign by global elite to defeat it. …If taxpayers want to preserve gains made thanks to tax competition, they must be weary of the threat posed by global tax cartels though organizations such as the OECD.

Speaking of the OECD, this video tells you everything you need to know.

The final kicker is that the bureaucrats at the OECD get tax-free salaries, so they’re insulated from the negative impact of the bad policies they want to impose on everyone else.

That’s even more outrageous than the fact that the OECD tried to have me thrown in a Mexican jail for the supposed crime of standing in the public lobby of a public hotel.

P.S. I just gave a speech to the Anguilla branch of the Society for Trust and Estate Professionals, and much of my remarks focused on the dangers of the BEPS scheme.

I took this picture from my balcony. As you can see, there are some fringe benefits to being a policy wonk.

And I travel to Nevis on Sunday to give another speech.

Tough work, but somebody has to do it. Needless to say, withe possibility of late-season snow forecast for Monday in the DC area, I’m utterly bereft I won’t be there to enjoy the experience.

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A Journalist’s First-Hand Report on the Corrupt Secrecy of an International Bureaucracy

As a taxpayer, I’m not a big fan of international bureaucracies. They consume a lot of money, pay themselves extravagant (and tax-free!) salaries, and generally promote statist policies.

The Paris-based Organization for Economic Cooperation and Development is a prime example. Originally created for benign purposes such as gathering statistics, it now is a bloated bureaucracy pursuing an anti-free market agenda.

But international bureaucracies also have a nasty habit of operating in the shadows and using thuggish behavior to thwart critics. And I have the scars to prove it from my efforts to protect fiscal sovereignty.

• Back in 2001, the OECD threatened to boycott its own global anti-tax competition meeting because one of the low-tax jurisdictions had the nerve to make me an adviser to its delegation.
• In 2008, the OECD threatened to have me thrown in a Mexican jail for the “crime” of standing in the public lobby of a hotel and providing advice to representatives of so-called tax havens.

But it’s not just the crowd in Paris that doesn’t believe in openness and fair play. A journalist recently traveled to South Korea to report on a World Health Organization conference on tobacco.

This doesn’t sound like the type of event that would involve skullduggery, but here’s part of what the reporter wrote for the Korea Times.

A monumental session during the World Health Organization’s (WHO) convention on tobacco control turned into an alarming attack on transparency, accountability and press freedom. …delegates of the member countries of the conference stripped the media of the ability to cover the meeting and escorted public onlookers from the premises. The decision to meet behind closed doors occurred when a discussion began about efforts to decrease tobacco use by increasing the price of tobacco products. Specifically, the convention attendees were discussing the framework for an international tobacco tax. This is one of the most controversial topics for debate in Seoul this week.

This is what is called a “learning moment.” And the journalist clearly recognized both the WHO’s hypocrisy and its troubling policy agenda.

As a reporter covering this meeting, this was not only a frustrating stance, but it raises some serious questions about an organization that for years has operated largely behind the scenes and without the benefit of much public scrutiny. When is the media more necessary than when an unaccountable, shadowy organization that devours millions of tax dollars each year from people across the world debates getting in the business of issuing global taxes? This effort to silence the press is particularly chilling since it is in direct conflict with the U.N. — the WHO’s parent organization—claims to fight to advance “free, independent and pluralistic media” across the world. Apparently, U.N. and WHO leaders believe in media rights in all cases except when the media covers them.

And remember, you’re paying for this thuggish behavior.

If you want to learn more about the underlying issue, I wrote about the WHO’s push for global tobacco taxation back in both May and September.

All of which is consistent with the broader ongoing push by the United Nations to get worldwide taxing power.

Needless to say, any form of global taxation would be a terrible development, but governments are sympathetic to such schemes since they view tax competition as a constraint on their ability to pursue redistribution and thus a limit on their efforts to buy votes with other people’s money.

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Another Push for Global Taxation from the United Nations

I spoke at the United Nations back in May, explaining that more government was the wrong way to help the global economy.

But I guess I’m not very persuasive. The bureaucrats have just released a new report entitled, “In Search of New Development Finance.”

As you can probably guess, what they’re really searching for is more money for global redistribution.

But here’s the most worrisome part of their proposal. They want the U.N. to be in charge of collecting the taxes, sort of a permanent international bureaucracy entitlement.

I’ve written before about the U.N.’s desire for tax authority (on more than one occasion), but this new report is noteworthy for the size and scope of taxes that have been proposed.

Here’s the wish list of potential global taxes, pulled from page vi of the preface.

Here’s some of what the report had to say about a few of the various tax options. We’ll start with the carbon tax, which I recently explained was a bad idea if imposed inside the U.S. by politicians in Washington. It’s a horrible idea if imposed globally by the kleptocrats at the United Nations.

…a tax of $25 per ton of CO2 emitted by developed countries is expected to raise $250 billion per year in global tax revenues. Such a tax would be in addition to taxes already imposed at the national level, as many Governments (of developing as well as developed countries) already tax carbon emissions, in some cases explicitly, and in other cases, indirectly through taxes on specific fuels.

Notice that the tax would apply only to “developed countries,” so this scheme is best characterized as discriminatory taxation. If Obama is genuinely worried about jobs being “outsourced” to nations such as China (as he implies in his recent attack on Romney), then he should announce his strong opposition to this potential tax.

But don’t hold your breath waiting for that to happen.

Next, here’s what the U.N. says about a financial transactions tax.

A small tax of half a “basis point” (0.005 per cent) on all trading in the four major currencies (the dollar, euro, yen and pound sterling) might yield an estimated $40 billion per year. …even a low tax rate would limit high-frequency trading to some extent. It would thus result in the earning of a “double dividend” by helping reduce currency volatility and raising revenue for development. While a higher rate would limit trading to a greater extent, this might be at the expense of revenue.

This is an issue that already has attracted my attention, and I also mentioned that it was a topic in my meeting with the E.U.’s Tax Commissioner.

But rather than reiterate some of my concerns about taxing financial consumers, I want to give a back-handed compliment the United Nations. The bureaucrats, by writing that “a higher rate…might be at the expense of revenue,” deserve credit for openly acknowledging the Laffer Curve.

By the way, this is an issue where both the United States and Canada have basically been on the right side, though the Obama Administration blows hot and cold on the topic.

Now let’s turn to the worst idea in the U.N. report. The clowns want to steal wealth from rich people. But even more remarkable, they want us to think this won’t have any negative economic impact.

…the least distorting, most fair and most efficient tax is a “lump sum” payment, such as a levy on the accumulated wealth of the world’s richest individuals (assuming the wealthy could not evade the tax). In particular, it is estimated that in early 2012, there were 1,226 individuals in the world worth $1 billion or more, 425 of whom lived in the United States, 90 in other countries of the Americas, 315 in the Asia-Pacific region, 310 in Europe and 86 in Africa and the Middle East. Together, they owned $4.6 trillion in assets, for an average of $3.75 billion in wealth per person.21 A 1 per cent tax on the wealth of these individuals would raise $46 billion in 2012.

I’ll be the first to admit that you can’t change people’s incentives to produce in the past. So if you steal wealth accumulated as the result of a lifetime of work, that kind of “lump sum” tax isn’t very “distorting.”

But here’s a news flash for the nitwits at the United Nations. Rich people aren’t stupid (or at least their financial advisers aren’t stupid). So you might be able to engage in a one-time act of plunder, but it is deliberate naiveté to think that this would be a successful long-run source of revenue.

For more information, I addressed wealth taxes in this post, and the argument I was making applies to a global wealth tax just as much as it applies to a national wealth tax.

Now let’s conclude with a very important warning. Some people doubtlessly will dismiss the U.N. report as a preposterous wish list. In part, they’re right. There is virtually no likelihood of these bad policies getting implemented at any point in the near future.

But the statists have been relentless in their push for global taxation, and I’m worried they eventually will find a way to impose the first global tax. And if you’ll forgive me for going overboard on metaphors, once the camel’s nose is under the tent, it’s just a matter of time before the floodgates open.

The greatest threat is the World Health Organization’s scheme for a global tobacco tax. I wrote about this issue back in May, and it seems my concerns were very warranted. The bureaucrats recently unveiled a proposal – to be discussed at a conference in South Korea in November – that would look at schemes to harmonize tobacco taxes and/or impose global taxes.

Here’s some of what the Washington Free Beacon wrote.

The World Health Organization (WHO) is considering a global excise tax of up to 70 percent on cigarettes at an upcoming November conference, raising concerns among free market tax policy analysts about fiscal sovereignty and bureaucratic mission creep. In draft guidelines published this September, the WHO Framework Convention on Tobacco Control indicated it may put a cigarette tax on the table at its November conference in Seoul, Korea. …it is considering two proposals on cigarette taxes to present to member countries. The first would be an excise tax of up to 70 percent. …The second proposal is a tiered earmark on packs of cigarettes: 5 cents for high-income countries, 3 cents for middle-income countries, and 1 cent for low-income countries. WHO has estimated that such a tax in 43 selected high-/middle-/low-income countries would generate $5.46 billion in tax revenue. …Whichever option the WHO ends up backing, “they’re both two big, bad ideas,” said Daniel Mitchell, a senior tax policy fellow at the Cato Institute. …Critics also argue such a tax increase will not generate more revenue, but push more sales to the black market and counterfeit cigarette producers. “It’s already huge problem,” Mitchell said. “In many countries, a substantial share of cigarettes are black market or counterfeit. They put it in a Marlboro packet, but it’s not a Marlboro cigarette. Obviously it’s a big thing for organized crime.” …The other concern is mission creep. Tobacco, Mitchell says, is easy to vilify, making it an attractive beachhead from which to launch future vice tax initiatives.

It’s my final comment that has me most worried. The politicians and bureaucrats are going after tobacco because it’s low-hanging fruit. They may not even care that their schemes will boost organized crime and may not raise much revenue.

They’re more concerned about establishing a precedent that international bureaucracies can impose global taxes.

I wrote the other day about whether Americans should escape to Canada, Australia, Chile, or some other nation when the entitlement crisis causes a Greek-style fiscal collapse.

But if the statists get the power to impose global taxes, then what choice will we have?

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Just as “Fair Trade” Means Protectionism for the Benefit of Special Interests, “Fair Tax Competition” Means Tax Harmonization for the Benefit of Politicians

Very few people are willing to admit that they favor protectionism. After all, who wants to embrace a policy associated with the Great Depression?

But people sometimes say “I want free trade so long as it’s fair trade.” In most cases, they’re simply protectionists who are too clever to admit their true agenda

In the Belly of the Beast at the European Commission

There’s a similar bit of wordplay that happens in the world of international taxation, and a good example of this phenomenon took place on my recent swing through Brussels.

While in town, I met with Algirdas Šemeta, the European Union’s Tax Commissioner, as part of a meeting arranged by some of his countrymen from the Lithuanian Free Market Institute.

Mr. Šemeta was a gracious host and very knowledgeable about all the issues we discussed, but when I was pontificating about the benefits of tax competition (are you surprised?), he assured me that he felt the same way, only he wanted to make sure it was “fair tax competition.”

But his idea of “fair tax competition” is that people should not be allowed to benefit from better policy in low-tax jurisdictions.

Allow me to explain. Let’s say that a Frenchman, having earned some income in France and having paid a first layer of tax to the French government, decides he wants to save and invest some of his post-tax income in Luxembourg.

In an ideal world, there would be no double taxation and no government would try to tax any interest, dividends, or capital gains that our hypothetical Frenchman might earn. But if a government wants to impose a second layer of tax on earnings in Luxembourg, it should be the government of Luxembourg. It’s a simple matter of sovereignty that nations get to determine the laws that apply inside their borders.

But if the French government wants to track – and tax – that flight capital, it has to coerce the Luxembourg government into acting as a deputy tax collector, and this generally is why high-tax governments (and their puppets at the OECD) are so anxious to bully so-called tax havens into emasculating their human rights laws on financial privacy.

Now let’s see the practical impact of “fair tax competition.” In the ideal world of Mr. Šemeta and his friends, a Frenchman will have the right to invest after-tax income in Luxembourg, but the French government will tax any Luxembourg-source earnings at French tax rates. In other words, there is no escape from France’s oppressive tax laws. The French government might allow a credit for any taxes paid to Luxembourg, but even in the best-case scenario, the total tax burden on our hypothetical Frenchman will still be equal to the French tax rate.

Imagine if gas stations operated by the same rules. If you decided you no longer wanted to patronize your local gas station because of high prices, you would be allowed to buy gas at another station. But your old gas station would have the right – at the very least – to charge you the difference between its price and the price at your new station.

Simply stated, you would not be allowed to benefit from lower prices at other gas stations.

So take a wild guess how much real competition there would be in such a system? Assuming your IQ is above room temperature, you’ve figured out that such a system subjects the consumer to monopoly abuse.

Which is exactly why the “fair tax competition” agenda of Europe’s welfare states (with active support from the Obama Administration) is nothing more than an indirect form of tax harmonization. Nations would be allowed to have different tax rates, but people wouldn’t be allowed to benefit.

For more information, here’s my video on tax competition.

And if you want information about the beneficial impact of “tax havens,” read this excellent column by Pierre Bessard and watch my three-part video series on the topic.

P.S. The Financial Transaction Tax also was discussed at the meeting, and it appears that the European actually intend on shooting themselves in the foot with this foolish scheme. Interestingly, when presented by other participants with some studies showing how the tax was damaging, Mr. Šemeta asked why we he should take those studies seriously since they were produced by people opposed to the tax. Since I’ve recently stated that healthy skepticism is warranted when dealing with anybody in the political/policy world (even me!), I wasn’t offended by the insinuation. But my response was to ask why we should act like the European Commission studies are credible since they were financed by governments that want a new source of revenue.

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Study from German Economists Shows that Tax Competition and Fiscal Decentralization Limit Income Redistribution

If we want to avoid the kind of Greek-style fiscal collapse implied by this BIS and OECD data, we need some external force to limit the tendency of politicians to over-tax and over-spend.

That’s why I’m a big advocate of tax competition, fiscal sovereignty, and financial privacy (read Pierre Bessard and Allister Heath to understand why these issues are critical).

Simply stated, I want people to have the freedom to benefit from better tax policy in other jurisdictions, especially since that penalizes governments that get too greedy.

I’m currently surrounded by hundreds of people who share my views since I’m in Prague at a meeting of the Mont Pelerin Society. And I’m particularly happy since Professor Lars Feld of the University of Freiburg presented a paper yesterday on “Redistribution through public budgets: Who pays, who receives, and what effects do political institutions have?”.

His research produced all sorts of interesting results, but I was drawn to his estimates on how tax competition and fiscal decentralization are an effective means of restraining bad fiscal policy.

Here are some findings from the study, which was co-authored with Jan Schnellenbach of the University of Heidelberg.

In line with the previous subsections, we find that countries with a higher GDP per employee, i.e. a higher overall labor productivity, have a more unequal primary income distribution. …fiscal competition within a country or trade openness as an indicator of globalization do not exacerbate, but reduce the gap between income classes. …expenditure and revenue decentralization restrict the government’s ability to redistribute income when fiscal decentralization also involves fiscal competition. …fiscal decentralization, when accompanied by high fiscal autonomy, involves significantly less fiscal redistribution. Please also note that fiscal competition induces a more equal distribution of primary income and, even though the distribution of disposable income is more unequal, it is open how the effect of fiscal competition on income distribution should be evaluated. Because measures of income redistribution usu-ally have adverse incentive effects which consequently affect economic growth negatively, fiscal competition might be favorable for countries which have strong egalitarian preferences. A rising tide lifts all boats and might in the long-run outperform countries with more moderate income redistribution even in distributional terms.

The paper includes a bunch of empirical results that are too arcane to reproduce here, but they basically show that the welfare state is difficult to maintain if taxpayers have the ability to vote with their feet.

Or perhaps the better way to interpret the data is that fiscal competition makes it difficult for governments to expand the welfare state to dangerous levels. In other words, it is a way of protecting governments from the worst impulses of their politicians.

I can’t resist sharing one additional bit of information from the Feld-Schnellenbach paper. They compare redistribution in several nations. As you can see in the table reproduced below, the United States and Switzerland benefit from having the lowest levels of overall redistribution (circled in red).

It’s no coincidence that the U.S. and Switzerland are also the two nations with the most decentralization (some argue that Canada may be more decentralized that the U.S., but Canada also scores very well in this measure, so the point is strong regardless).

Interestingly, Switzerland definitely has significantly more genuine federalism than any other nation, so you won’t be surprised to see that Switzerland is far and away the nation with the lowest level of tax redistribution (circled in blue).

One clear example of Switzerland’s sensible approach is that voters overwhelmingly rejected a 2010 referendum that would have imposed a minimum federal tax rate of 22 percent on incomes above 250,000 Swiss Francs (about $262,000 U.S. dollars). And the Swiss also have a spending cap that has reduced the burden of government spending while most other nations have moved in the wrong direction.

While there are some things about Switzerland I don’t like, its political institutions are a good role model. And since good institutions promote good policy (one of the hypotheses in the Feld-Schnellenbach paper) and good policy leads to more prosperity, you won’t be surprised to learn that Swiss living standards now exceed those in the United States. And they’re the highest-ranked nation in the World Economic Forum’s Global Competitiveness Report.

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Germany’s Dark Vision for Europe

Like Sweden and Denmark, Germany is a semi-rational welfare state. It generally relies on a market-oriented approach in areas other than fiscal policy, and it avoided the Keynesian excesses that caused additional misery and red ink in America (though it is far from fiscally conservative, notwithstanding the sophomoric analysis of the Washington Post).

Nonetheless, it’s difficult to have much optimism for Europe’s future when the entire political establishment of Germany blindly thinks there should be more centralization, bureaucratization, and harmonization in Europe.

The EU Observer has a story about the agenda of the de facto statists in the Christian Democratic party who currently run Germany.

“Harmonization über alles!”

…what Merkel and her party are piecing together is a radical vision of the EU in a few years time – a deep fiscal and political union. The fiscal side involves tax harmonisation, a tightly policed Stability and Growth Pact with automatic sanctions for countries that breach debt and deficit rules, and the possibility of an EU Commissioner responsible for directly intervention to oversee budgetary policy in a crisis-hit country. …On the institutional side, the CDU backs a directly elected President of the European Commission as well as clearly establishing the European Parliament and Council of Ministers as a bi-cameral legislature with equal rights to initiate EU legislation with the Commission.

Keep in mind that the Christian Democrats are the main right-of-center party in Germany, yet the German political spectrum is so tilted to the left that they want tax harmonization (a spectacularly bad idea) and more centralization.

Heck, even the supposedly libertarian-oriented Free Democratic Party is hopelessly clueless on these issues.

Not surprisingly, the de jure statists of Germany have the same basic agenda. Here’s some of what the article says about the agenda of the Social Democrat and Green parties.

…its commitments to establish joint liability eurobonds and a “common European fiscal policy to ensure fair, efficient and lasting receipts” would also involve a shift of economic powers to Brussels. While both sides have differing ideological positions on the political response to the eurozone crisis – they are talking about more Europe, not less.

The notion of eurobonds is particularly noteworthy since it would involve putting German taxpayers at risk for the reckless fiscal policies in nations such as Greece, Italy, and Spain. That’s only a good idea if you think it’s smart to co-sign a loan for your unemployed and alcoholic cousin with a gambling addiction.

All this makes me feel sorry for German taxpayers.

Then again, if you look at the long-run fiscal outlook of the United States, I feel even more sorry for American taxpayers. Thanks to misguided entitlement programs, we’re in even deeper trouble than Europe’s welfare states.

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The Great Tax Haven Debate, Part II

Back in April, responding to an article written by Ann Hollingshead for the Task Force on Financial Integrity and Economic Development, I wrote a long post defending so-called tax havens.

I went through the trouble of a point-by-point response because her article was quite reasonable and focused on some key moral and philosophical issues (rather than the demagoguery I normally have to deal with when people on the left reflexively condemn low-tax jurisdictions).

She responded to my response, and she raised additional points that deserve to be answered.

So here we go again. Let’s go through Ann’s article and see where we agree and disagree.

A couple of weeks ago, I wrote a blog post criticizing the philosophies of Dan Mitchell, a libertarian scholar from the Cato Institute. I asked for a “thoughtful discussion” and I got it—both from the comments section of our blog and from Dan himself.  On his own blog, Dan replied with a thought-provoking point-by-point critique of my piece.

It has been a polite discussion, which is good because readers get to see that we don’t really disagree on facts. Our differences are a matter of philosophy, as Ann also acknowledges.

Dan made several interesting points in his rebuttal. As much as I’d like to take on the whole post right now, my reply would be far too long and I don’t think our readers would appreciate a blog post that approaches a novella. Rather I’ll focus on a couple of his comments that I find interesting on a philosophical level (there were many) and which demand a continued conversation because, I believe, they are the basis of our differences. We’ll start with a rather offhand remark in which Dan indirectly refers to financial privacy as a human right. This is an argument we’ve heard before. And it is worth some exploration.Unless I am very much mistaken, Dan’s belief that financial privacy is a human right arises out of his fundamental value of freedom. My disagreement with Dan, therefore, does not arise from a difference in the desire to promote human rights (I believe we both do), but rather in the different relative weights we each place on the value of privacy, which Dan (I’m supposing) would call an extension of freedom.

I wouldn’t argue with her outline, though I think it is incomplete. I’m a big fan of privacy as a principle of a civil and just society, but I also specifically support financial privacy as a means to an end of encouraging better tax policy. Simply stated, politicians are much more likely to reduce or eliminate double taxation if they feel such taxes can’t be enforced and simply put a country in a much less competitive position.

Okay, so on to [my] answer of the subject of this post. Privacy—and financial privacy by extension—is important. But is it a human right? That’s a big phrase; one which humanity has no business throwing around, lest it go the way of “[fill in blank]-gate” or “war on [whatever].” And as Dan himself points out, governments have a way of fabricating human rights—apparently some European courts have ruled that free soccer broadcasts and owning a satellite dish are a human rights—so it’s important that we get back to [philosophical] basics and define the term properly. The nearly universally accepted definition of “human rights” was established by the Universal Declaration of Human Rights, which the United Nations adopted in 1948. According to the UN, “human rights” are those “rights inherent to all human beings,” regardless of “nationality, place of residence, sex, national or ethnic origin, colour, religion, language, or any other status.” The Declaration includes 30 Articles which describe each of those rights in detail. “Financial privacy” per se is not explicitly a human right in this document, but “privacy” is, and I think it’s reasonable to include financial privacy by extension. But privacy is defined as a fundamental, not an absolute, human right. Absolute rights are those that there is never any justification for violating. Fundamental freedoms, including privacy and freedom from detention, can be ethically breached by the government, as long as they authorized by law and not arbitrary in practice. The government therefore has the right to regulate fundamental freedoms when necessary.

I’m not sure how to react. There are plenty of admirable provisions in the U.N.’s Universal Declaration of Human Rights, but there are also some nonsensical passages – some of which completely contradict others.

Everyone hopefully agrees with the provisions against slavery and in favor of equality under law, but Article 25 of the U.N. Declaration also includes “the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services.”

That sounds like a blank check for redistributionism, similar to the statism that I experienced when I spoke at the U.N. last month, and it definitely seems inconsistent with the right of property in Article 17.

I guess what I’m trying to say is that I don’t care that the U.N. Universal Declaration of Human Rights includes a “right to privacy” because I don’t view that document as having any legal or moral validity. I don’t know whether it’s as bad as the European Union’s pseudo-constitution, but I do know that my support for privacy is not based on or dependent on a document from the United Nations.

As an aside, I can’t help noting that Articles 13 and 15 of the U.N. Declaration guarantee the right to emigrate and the right to change nationality, somethings leftists should keep in mind when they demonize successful people who want to move to nations with better tax law.

Getting back to Ann’s column, she confirms my point that you can’t protect property rights for some people while simultaneously giving other people a claim on their output.

That’s important because it means, that when it comes to freedom and privacy, we need to make choices. We can’t always have them all at once. To use a hideously crude example that gets back to the issue of tax evasion, in a developing country, a rich person’s right to financial privacy might be at odds with a poor person’s right to “a standard of living adequate for the health and well-being of himself and of his family.”

For those who are not familiar with the type of discussion, it is the difference between “negative rights” promoted by classical liberals, which are designed to protect life, liberty, and property from aggression, and the “positive rights” promoted by the left, which are designed to legitimize the redistributionist state.

Tom Palmer has a good discussion of the topic here, and he notes that “positive rights” create conflict, writing that, “…classical liberal ‘negative’ rights do not conflict with each other, whereas ‘positive’ rights to be provided with things produce many conflicts. If my ‘right to health care’ conflicts with a doctor’s ‘right to liberty,’ which one wins out?”

Continuing with Ann’s article, she says values conflict with one another, though that’s only if true if one believes in positive rights.

I started this post with a discussion of values, because at the core that’s what we’re talking about. Values are relative, individual, and often in conflict with one another. And they define how we rank our choices between human rights. Dan values freedom, perhaps above most else. He might argue that economic freedom would lead to an enrichment of human rights at all levels, but he probably wouldn’t disagree that that thesis remains untested. My views are a little more complicated because I don’t get to enjoy the (albeit appealing and consistent) simplicity of libertarianism.

I’m tempted to say, “C’mon in, Ann, the water’s fine. Libertarianism is lots of fun.” To be a bit more serious, libertarianism is simple, but it’s not simplistic. You get to promote freedom and there’s no pressure to harass, oppress, or pester other people.

As my colleague David Boaz has stated, “You could say that you learn the essence of libertarianism — which is also the essence of civilization –  in kindergarten: don’t hit other people, don’t take their stuff, keep your promises.”

The world would be a lot better if more people rallied to this non-coercive system.

One more point. Dan mentioned he does “fully comply” with the “onerous demands imposed on [him] by the government.” But as Dan insinuates, irrespective of an individual’s personal values, those demands are not optional. In the United States, we have the luxury of electing a group of individuals to represent our collective values. Together those people make a vision for the country that reflects our ideals. And then, we all accept it. If our country got together and decided to value freedom above all else, we would live in a world that looks a lot like Dan’s utopia. But, frankly, it hasn’t. So we respect our tax code out of a respect for the vision of our country. Dan has the right to try to shape that vision, as do I. Neither of us has the right to violate it.

What Ann writes is true, but not persuasive. Libertarians don’t like untrammeled majoritarianism. We don’t think two wolves and a sheep should vote on what’s for lunch.

We like what our Founding Fathers devised, a constitutional republic where certain rights were inalienable and protected by the judicial system, regardless of whether 90 percent of voters want to curtail our freedoms.

Ann, as you can see from her final passage, does not agree.

That, at is heart, is my problem with both tax evasion and tax avoidance. Neither lines up with the spirit of our collective compact; although the latter is not necessarily reflected in the official laws on the books. I’m not saying tax avoiders should be thrown in jail; they’ve done nothing illegal. I’m saying the regulations that confine us should line up with the vision we’ve created and the values we’ve agreed upon. If that vision is Dan’s, I’ll accept it. But I’m glad he’ll (begrudgingly) accept ours too.

I’m not automatically against having a “collective compact.” After all, that’s one way of describing the American Constitution. But I will return to my point about America’s founders setting up that system precisely because they rejected majoritarianism.

So what does all this mean? Probably nothing, other than the less-than-remarkable revelation that Ann and I have different views on the legitimate role(s) of the federal government.

Since I want to restrain the size and scope of government (not only in America, but elsewhere in the world) and avert future Greek-style fiscal nightmares, that means I want tax competition. And, to be truly effective, that means tax havens.

If that appeals to you (or at least seems like a reasonably hypothesis), I invite you to read some writings by Allister Heath of the United Kingdom and Pierre Bessard of Switzerland.

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A Rare Bit of Good News from Europe

It seems that there’s nothing but bad news coming from Europe. Whether we’re talking about fake austerity in the United Kingdom, confiscatory tax schemes in France, or bailouts in Greece, the continent seems to be a case study of failed statism.

But that’s not completely accurate. Every so often I highlight good news, such as Switzerland’s successful spending cap, Sweden’s shift to the right on spending, Germany’s wise decision not to be Keynesian, and Portugal’s admission that “stimulus” doesn’t work.

Admittedly, the good news from Europe is oftentimes merely the failure to do something bad. But I’ll take victories in any form.

And that’s why I’m happy that Austria and Luxembourg are blocking a misguided European Commission plan to undermine financial privacy in order to increase double taxation of income that is saved and invested.

Here are some cheerful passages from a story in the EU Observer.

“Completely unjustifiable … grossly unfair … a mystery” – the European Commission and the Danish EU presidency have given Austria and Luxembourg a tongue-lashing for protecting tax evaders. The harsh words came after the two countries on Tuesday (15 May) blocked the commission from holding talks with Switzerland on a new savings tax law designed to recoup some of the estimated €1 trillion a year lost to EU exchequers in tax fraud and evasion. Tax commissioner Algirdas Semeta in a press conference in Brussels said: “The position that Austria and Luxembourg have taken on this issue is grossly unfair. They are hindering 25 willing member states from improving tax compliance and finding additional sources of income.” …Danish economic affairs minister Margrethe Vestager took his side. “It is a mystery why we shouldn’t move on making people pay the taxes that they should pay,” she noted. She described Austria and Luxembourg’s decision as “unfortunate.” For their part, Luxembourg and Austria have declined to publicly explain why they are against the move. Semeta on Tuesday indicated they object to “automatic transfer” of tax data between EU countries and Switzerland, even though the alternative is trusting Switzerland to decide which data it gives and which it withholds. He added that automatic exchange is becoming the international gold standard in the field, with “the US moving in the same direction.”

The quote from the Danish economic affairs minister is especially nauseating. It’s not the “taxes that they should pay.” It’s the “taxes that greedy politicians demand.”

Good tax policy is predicated on the notion that there should not be a bias against income that is saved and invested. This is because double taxation undermines capital formation and thus reduces long-run growth.

Yet European politicians, like many of their American counterparts, are drawn to class warfare tax policy and can’t resist trying to penalize the “evil rich.”

So let’s tip our proverbial hats to Austria and Luxembourg. This is probably just a short-term victory over the unrelenting forces of statism, but let’s enjoy it while it lasts.

P.S. This European kerfuffle is a fight over tax competition vs. tax harmonization. To understand why financial privacy and fiscal sovereignty are desirable, watch the four-part video series at this post.

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Time for Me to Defend My Work on Tax Havens

A few days ago, I explained why I’m a big fan of tax competition. Simply stated, we need to subject governments to competitive pressure to at least partially offset the tendency of politicians to over-tax and over-spend.

Tax havens play an important role in this liberalizing process, largely because they do not put themselves under any obligation to enforce the bad tax laws of other jurisdictions. They also use privacy laws to protect their sovereign control of what gets taxed inside their borders (this is what separates a “tax haven” from a more conventional low-tax jurisdiction). This means they are fiscal safe zones, particularly for people who want to protect their assets from the pervasive double taxation that exists in so many nations.

Not everybody agrees with my analysis (gee, what a surprise). To cite one example, the petty bureaucrats at the OECD got so agitated at me in 2009 (when I was offering advice to representatives of so-called tax havens while standing in a public lobby of a public hotel) that they threatened to have me thrown in a Mexican jail.

Now I have a new critic, though hopefully someone who would never consider thuggish tactics to suppress dissent. Ann Hollingshead writes for the Task Force on Financial Integrity and Economic Development, which (notwithstanding the name of the organization) seems to favor bigger government.

Anyhow, she wrote an article specifically criticizing my work on tax havens. So I figured it was time for a fisking, while means a point-by-point rebuttal. Here’s how she begins, and I’ll follow up her points with my responses.

Officially Dan Mitchell is a Senior Fellow at the Cato Institute, a conservative public policy research organization, and a researcher on tax reform. Unofficially, he has (perhaps ironically?) called himself the “world’s self-appointed defender of so-called tax havens.”

No irony on my part. As I have openly stated, tax havens are a key part of tax competition, which is a necessary (though sadly not sufficient) process to restrain the greed of the political class.

Oddly enough, Mitchell and I agree on many of the facts about these havens. We both have observed, for example, that there are buildings in Delaware and the Cayman Islands that house thousands of corporations. Mitchell concludes there is nothing wrong with either; I conclude there is something wrong with both. Mitchell also agrees that the United States“could be considered the world’s largest tax haven.” On that topic, he’s even cited my paper on non-resident deposits in secrecy jurisdictions. In his comment, he does not take issue with my methodology or my results, but rather concludes that my finding that the United States is the largest holder of non-resident deposits “makes the case for pro-market policies.” I, on the other hand, have argued that these findings support across the board reform, rather than that limited to traditional offshore financial centers.

Fair enough. We both recognize that the United States is a big tax haven. But we have different conclusions. I think it is unfortunate that only non-resident foreigners can benefit from these policies, while Ann wants to crack down on small low-tax jurisdictions such as Monaco, Bermuda, Liechtenstein, and the Cayman Islands, as well as big nations such as the United States. Sadly, Ann’s side has somewhat prevailed, and many of the havens have agreed to become deputy tax collectors for nations with bad tax law.

So how is it that two (relatively intelligent?) people can draw such different conclusions? I would argue our differences lie not in our facts, or perhaps even our economics, but in our underlying philosophical and theoretical differences.

I guess I should be happy that she holds out the possibility that I’m “relatively intelligent.”

Mitchell implicitly takes the position that tax havens do enable tax evasion and this helps to lower tax rates. He argues “it is largely globalization—not ideology—that has driven [a] ‘race to the bottom’” where global top corporate tax rates now average about 27 percent, down from 67 percent in 1980. Mitchell does not only believe this has occurred, but also maintains it is a positive development. He argues tax competition drives tax policy in the “right direction” (i.e., lower tax rates), has called these developments “positive,” and has even likened policy makers to “thieves” and tax competition to home “alarm systems.”

Ann makes one minor error. Corporate tax rates have dropped from a high of about 48 percent (and are now down to less than 25 percent). Top personal tax rates, by contrast, used to be more than 67 percent (and have now dropped to about 41 percent).

Regarding these developments, I think they are very positive. And I also think that politicians are akin to thieves, though Godfrey Bloom, a British member of the European Parliament, says it with a much better accent.

Mitchell’s argument that lower tax rates are always better and that those who tax others are thieves, makes several implicit assumptions about the relationship of citizens to their government. From his line of reasoning, Mitchell either believes, on a philosophical level, that governments do not have the right to tax their citizens or, on an economic level, that lower tax rates are always better, or both.

I definitely believe that lower tax rates are better than higher tax rates.

Mitchell may believe that taxation is the equivalent of thievery—and therefore that governments do not have the right to tax their citizens, just a thief does not have the right to steal. But he is also (more than likely) not an anarchist, which is the next logical extension of this reasoning, because on a number of occasions he has advocated a flat tax.

Ann makes a good point here. I’ve already admitted, in this post featuring a funny video mocking libertarianism, that I don’t see how to privatize the justice system and national defense, so I’m not an anarcho-capitalist.

Mitchell also argues lower tax rates are universally better, so at what point does the tax rate become acceptable? Clearly he doesn’t believe the tax rate should be zero, because that would get back to the anarchism theory. And he did once offer tepid support for Herman Cain’s 9 percent rate.

Another fair point. If a 50 percent tax is confiscatory and if politicians who impose such a tax are akin to thieves, then why would a 10 percent tax be acceptable? And would politicians imposing low tax rates still be acting like crooks?

Those are tough questions. But at the risk of dodging thorny philosophical issues, I’ll claim it doesn’t really matter. Government is too big right now and taxes are too onerous and unfair. If I somehow manage to bring government down to 10 percent of GDP, as the Rahn Curve suggests if we want to maximize prosperity for the American people, then I’ll have the luxury of worrying about the moral legitimacy of a limited public sector.

Clearly there’s a disconnect. Taxation cannot both be thievery, but also acceptable at a lower level. There is no evidence that, if tax competition through tax evasion is real, it would cease to drive down tax rates at some level that has been deemed acceptable by Dan Mitchell. So at what point does the “race to the bottom” bottom out? And is that a point where the United States can still maintain services that I’m sure Mitchell doesn’t advocate giving up, like police and law courts?

If I understand this passage correctly, I disagree. Tax competition does not drive tax rates to zero. It just encourages better policy. There’s pressure to lower tax rates, and there’s pressure to reduce double taxation of income tat is saved and invested. But there’s no reason to think that tax competition and/or tax evasion forces the overall tax burden “to the bottom.”

But I would be remiss not to point out some internal inconsistencies in Mitchell’s arguments, in addition to his logical ones. While he argues tax competition through tax evasion in havens has fostered lower tax rates worldwide, he has also reckoned that “only a tiny minority” of people who keep their money in havens “are escaping onerous tax burdens.” First of all, I would be interested to see where Mitchell got that statistic because no one knows how much money is deposited in havens, let alone its origins. Such information isn’t publicly available. That’s actually the whole point. And secondly, and more importantly, I’m unclear on how such a “tiny minority” of oversees deposits could drive international tax policy to such an extent that the average corporate tax rates have dropped by more than half in thirty years.

Actually, there is considerable data about the amount of money in tax havens. The Bank for International Settlements is a good place for those who like to peruse such information.

But that’s a secondary point. Her main criticism is that I’m inconsistent when I say tax evasion is minor, so let me allow me to elaborate. Tax competition works by making politicians fearful that jobs and investment will migrate to jurisdiction with better tax law. It works just as well when people engage in legal tax planning and legal tax avoidance as it does with illegal tax evasion.

Places such as the Cayman Islands, for instance, rely on completely legal and transparent lines of business such as hedge funds and captive insurance companies. Places such as Panama have completely legal shipping registries. Places such as the British Virgin Islands specialize in completely legal company formation. Places such as the Channel Islands focus on completely legal trusts. Places such as Bermuda are known for completely legal reinsurance firms.

The “illegal” part of the offshore business does exist (at least as defined by high-tax nations), and it tends to be in the areas of private wealth management and banking. And even then, only in jurisdictions that have very strong human rights laws protecting financial privacy.

To be sure, there’s no way to precisely state how much tax evasion exists, but I can say with total certainty that the left’s claims are absurd. During the 2008 campaign, for instance, then-candidate Obama said that his anti-tax haven policies would generate $100 billion every year. When his law was enacted in 2010, that huge amount of money shrank to only $870 million per year. And even that estimate is a mirage because the President’s FATCA law is discouraging productive investment in the United States.

It is not my intention to demonize Mitchell and I hope you’ll notice that I’ve neither called him, nor implied that he is, a “careless and know-nothing hack.” I also have no interest in taking easy jabs that imply he is personally benefiting from tax evasion through havens or that he is seeking to destabilize theU.S.government by removing its ability to tax its citizens. Such attacks might generate readers, but they don’t generate thoughtful discussion and I’m much more interested in the latter than the former.

You may be wondering why she included the comment about a “careless and know-nothing hack.” It’s because I used that phrase to describe a journalist who wrote a very sloppy article. But I don’t automatically disparage those with different views. I’ll disagree with people and argue with them, but I don’t mock them if they have serious and substantive views.

I suppose I should also say, just for the record, that I fully comply with all the onerous demands imposed on me by the government. Not because I want to, but rather because I worry that my work on public policy sooner or later will attract some discriminatory and politically motivated attention from the IRS. It hasn’t happened yet, so I hope I’m being needlessly paranoid, but suffice to say that I go out of my way to even declare income that I know isn’t reported to the tax police.

So here are my questions, to anyone who will answer. 1) On what philosophical basis, if any, do governments draw the right to tax their citizens?; 2) Do citizens have a moral or philosophical right to evade taxation by using tax havens under any circumstances?; 3) If so, at what level of taxation do those citizens no longer have a moral right to evade tax?; and 4) what is the philosophical reasoning that justifies this level?

Now we’re back to the hard-to-answer questions. When is government too big and when does it impose so many demands that people are justified in evading taxation? I’m not sure, but I’ll fall back on what former Supreme Court Justice Potter Stewart said about pornography: “I know it when I see it.”

Put in context, I don’t blame people from France for evading confiscatory taxation. I don’t blame people in corrupt nations such as Mexico for evading taxation. I don’t blame people in dictatorial nations such as Venezuela for evading taxation.

But I would criticize people in Singapore,Switzerland, Hong Kong, or Estonia for dodging their tax liabilities. They are fortunate to live in nations with reasonable tax rates, low levels of corruption, and good rule of law.

Let me now circle back to the main point. In a world with vigorous tax competition, especially when augmented by the strong human rights laws of tax havens, nations will face some pressure to move their policies closer to Hong Kong and away from France. That’s something worth protecting and promoting, not something to be stamped out by high-tax nations seeking to create a tax cartel – sort of an OPEC for politicians.

Last but not least, if you haven’t yet overdosed on this topic, here’s my speech to a Capitol Hill audience on the valuable role of tax havens in the global economy.

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Professor Greg Mankiw: If You Value Inidividual Liberty, then Protect, Promote, and Preserve Competition Between Governments

Other than my experiment dealing with corporate taxation, the first video I narrated for the Center for Freedom and Prosperity dealt with the issue of tax competition.

It was a deliberate choice because I view competition among governments as one of the few effective restraints on the greed of the political class.

Simply stated, in the absence of competitive pressure, politicians will over-tax and over-spend until the welfare state collapses of its own weight. Some of them self-destruct anyhow because sometimes politicians can’t resist myopic policy decisions even when they know the house of cards will come tumbling down. Greece is a good example, though this cartoon shows the same phenomenon in a more amusing fashion.

But if we want to save other nations from that fate, we need competition among governments so politicians have to worry that the geese with the golden eggs can fly away to nations with better policy.

This is why protecting, promoting, and preserving tax competition is my top issue. Heck, I’ve even run the risk of being thrown in a Mexican jail because of my efforts to defend the right of jurisdictions to compete with decrepit welfare states by implementing pro-growth fiscal policy.

With this as background, you won’t be surprised to learn that I’m a big fan of what Greg Mankiw wrote this weekend in the New York Times.

Here’s some of his column, beginning with the (hopefully) obvious point that competition is what drives an economy and provides benefits to consumers.

Most everyone agrees that competition is vital to a well-functioning market economy. Since the days of Adam Smith, economists have understood that the invisible hand of the marketplace works only if producers of goods and services vie with one another. Competition keeps prices low and provides an incentive to improve and innovate.

He then explains that the same principle of competition can protect the interests of taxpayers just as it protects the interests of consumers.

For much the same reason, competition among governments leads to better governance. In choosing where to live, people can compare public services and taxes. They are attracted to towns that use tax dollars wisely. Competition keeps town managers alert. It prevents governments from exerting substantial monopoly power over residents. If people feel that their taxes exceed the value of their public services, they can go elsewhere. They can, as economists put it, vote with their feet. The argument applies not only to people but also to capital. Because capital is more mobile than labor, competition among governments significantly constrains how capital is taxed. Corporations benefit from various government services, including infrastructure, the protection of property rights and the enforcement of contracts. But if taxes vastly exceed these benefits, businesses can — and often do — move to places offering a better mix of taxes and services.

He also points out that federalism is a way of reducing the monopoly power of central governments.

Conservatives applaud such competition among governments. They are skeptical of government power, and they see competition as a check on its potential abuse. Because people and capital will flee from places where their tax dollars do not deliver commensurate value, government officials have little latitude to pursue personal agendas that are substantially adverse to any group of citizens. This logic leads naturally to the principle of federalism. Because exiting a state or locality is easier than leaving the nation, some policy options should be available to state and local governments but not to the federal government. The founding fathers were no fools.

Not surprisingly, the class-warfare crowd despises competition among governments. That’s why they want fiscal policy determined by Washington – and also why they support the pernicious efforts of international bureaucracies to cripple tax competition among nations.

While conservatives embrace governmental competition, liberals have good reason to worry about it. The left has a more expansive view of the role of public policy. Liberals want the government not only to provide public services but also to redistribute economic resources. In the words of President Obama, they want to “spread the wealth around.” Yet redistribution is harder when people and capital are free to move to other jurisdictions that offer better deals.

Mankiw’s column is worth sharing, so please send this post to friends and colleagues. I’d also recommend these powerful short statements by Dan Hannan and Godfrey Bloom, both British members of the European Parliament. And here’s another video on the topic from the Center for Freedom and Prosperity, but you get to listen to someone more appealing than me.

But if you like listening to me, for inexplicable reasons, here’s my three-part video series on the value of tax havens as part of the tax competition process.

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Should States Be Allowed to Tax Outside their Borders, Particularly if It Means a Database of Your Online Purchases?

Tax competition, as I have explained to the point of being a nuisance, is an important restraint on the greed of the political class. Simply stated, politicians are less like to over-tax and over-spend if they know that geese with the golden eggs can fly across the border.

This is mostly an issue in the world of international tax policy, but the same principles apply for sub-national governments inside a nation.

State and local governments should compete with each by offering the best fiscal climate. Sadly, just as high-tax nations such as France and Germany are trying to hinder global tax competition, high-tax state governments are seeking to undermine fiscal rivalry inside the United States.

More specifically, they want to create a state sales tax cartel that would allow governments to force out-of-state businesses serve as deputy tax collectors. Greedy politicians are fearful that online shopping deprives them of revenue, so they are pushing for a privacy-threatening database that will enable them to track and tax these transactions.

I explained this issue last week for a standing-room-only audience on Capitol Hill.

The entire discussion is posted online, including the very astute observations of my former Heritage Foundation colleague, Adam Thierer, now at the Mercatus Center.

Investor’s Business Daily also has opined on why this is a bad idea, but if you want to get really worried, the clowns at the United Nations want to power to tax and regulate the Internet.

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Patriotism, Loyalty, Tax Competition, and “Tax Fugitives”

I fight to preserve tax competition, fiscal sovereignty, and financial privacy for the simple reason that politicians are less likely to impose destructive tax policy if they know that labor and capital can escape to jurisdictions with more responsible fiscal climates.

My opponents in this battle are high-tax governments, statist international bureaucracies such as the Organization for Economic Cooperation and Development (OECD), and left-wing pressure groups, all of which want to impose some sort of global tax cartel – sort of an “OPEC for politicians.”

In my years of fighting this battle, I’ve has some strange experiences, most notably in 2008 when the OECD threatened to have me thrown in a Mexican jail for the supposed crime of standing in a public area of a hotel and advising representatives of low-tax jurisdictions on how best to resist fiscal imperialism.

A few other bizarre episodes occurred in Barbados, back when I was first getting involved in the issue. Here’s a summary of that adventure.

As part of its “harmful tax competition” project, the OECD had called a meeting in 2001 and invited officials from the so-called tax havens to attend in hopes of getting them to surrender their fiscal sovereignty and agree to become deputy tax collectors for uncompetitive welfare states.

Realizing that the small, relatively powerless low-tax nations and territories would be out-gunned and out-manned in such a setting, I organized a delegation of liberty-minded Americans to travel to Barbados and help fight back (as regular readers know, I’m willing to make big sacrifices and go to the Caribbean when it’s winter in Washington).

One of the low-tax nations asked me to provide technical assistance, so they made me part of their delegation. But when I got to the OECD conference, the bureaucrats refused to let me participate. That initial obstacle was overcome, though, when representatives from the low-tax country arrived and they created a stink.

So I got my credentials and went into the conference. But this obviously caused some consternation. Bureaucrats from the OECD and representatives from the Clinton Treasury Department (this was before Bush’s inauguration)  began whispering to each other, followed by some OECD flunky coming over to demand my credentials. I showed my badge, which temporarily stymied the bad guys.

But then a break was called and the OECD announced that the conference couldn’t continue if I was in the room. The fact that the OECD and some of the high-tax nations had technical consultants of their own was immaterial. The conference was supposed to be rigged to generate a certain outcome, and my presence was viewed as a threat.

Given the way things were going, with the OECD on the defensive and low-tax jurisdictions unwilling to capitulate, we decided to let the bureaucrats have a symbolic victory – especially since all that really happened is that I sat outside the conference room and representatives from the low-tax jurisdictions would come out every few minutes and brief me on what was happening. And everything ended well, with the high-tax nations failing in their goal of getting low-tax jurisdictions to surrender by signing “commitment letters” drafted by the OECD.

While the controversy over my participation in the meeting was indicative of the OECD’s unethical and biased behavior, the weirdest part of the Barbados trip occurred at the post-conference reception at the Prime Minister’s residence.

I was feeling rather happy about the OECD’s failure, so I was enjoying the evening. But not everybody was pleased with the outcome. One of the Clinton Treasury Department officials came up and basically accused me of being disloyal to the United States because I opposed the Administration’s policy while on foreign soil.

As you can probably imagine, that was not an effective argument. As this t-shirt indicates, my patriotism is to the ideals of the Founding Fathers, not to the statist actions of the U.S. government. And I also thought it was rather silly for the Treasury Department bureaucrat to make that argument when there was only a week or so left before Clinton was leaving office.

I’m reminded of this bit of personal history because of some recent developments in the area of international taxation.

The federal government recently declared that a Swiss bank is a “fugitive” because it refuses to acquiesce to American tax law and instead is obeying Switzerland’s admirable human rights policy of protecting financial privacy. Here are some details from a report by Reuters.

Wegelin & Co, the oldest Swiss private bank, was declared a fugitive after failing to show up in a U.S. court to answer a criminal charge that it conspired to help wealthy Americans evade taxes. …The indictment of Wegelin, which was founded in 1741, was the first in which the United States accused a foreign bank, rather than individuals, of helping Americans commit tax fraud. …Wegelin issued a statement from Switzerland saying it has not been served with a criminal summons and therefore was not required to appear in court. “The circumstances create a clear dilemma for Wegelin & Co,” it said. “If it were to adhere to current U.S. legal practice aimed at Swiss banks, it would have to breach Swiss law.” …Wegelin has no branches outside Switzerland.

It’s time for me to again be unpatriotic because I’m on the side of the “fugitive.” To be blunt, a Swiss bank operating on Swiss soil has no obligation to enforce bad U.S. tax law.

To understand the principles at stake, let’s turn the tables. What if the Iranian government demanded that the American government extradite Iranian exiles who write articles critical of that country’s nutjob leadership? Would the Justice Department agree that the Iranian government had the right to persecute and prosecute people who didn’t break U.S. law. Of course not (at least I hope not!).

Or what if the Chinese government requested the extradition of Tiananmen Square protesters who fled to the United States? Again, I would hope the federal government would say to go jump in a lake because it’s not a crime in America to believe in free speech.

I could provide dozens of additional examples, but I assume you get the point. Nations only cooperate with each other when they share the same laws (and the same values, including due process legal protections).

This is why Wegelin is not cooperating with the United States government, and this is why genuine patriots who believe in the rule of law should be on the side of the “fugitive.”

For further information, here’s a video I narrated on tax competition.

The moral of the story is that “tough on crime” is the right approach, but only when laws are just. At the risk of stating the obvious, the internal revenue code does not meet that test – especially when the IRS is trying to enforce it in a grossly improper extraterritorial fashion.

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Clever Left-Wing Satire vs. Stupid Left-Wing Satire

I’m perfectly willing to give my opponents credit when they do something clever and/or effective.

I posted this video making fun of libertarians, for instance, because it is genuinely funny. People like me, I will confess, sometimes are so allergic to government that we do things that make us easy targets for satire.

Well, here’s a video parody of Mitt Romney and the Cayman Islands, obviously designed to resemble the Corona beer commercials. I’m not impressed.

My tepid reaction is not because I recently defended Romney’s use of Cayman-based investment vehicles.

Indeed, here’s an old video attacking tax havens, and I think it’s sufficiently amusing that I just uploaded it onto my Youtube channel because it’s worth sharing and I couldn’t find it online.

Both of these leftist videos make silly and inaccurate points, but the anti-Romney video is simplistic and the entire premise is false. He’s not hiding anything. Intelligent satire uses the truth as a starting point. This video doesn’t.

The anti-Cheney video, by contrast, has some big mistakes, but at least it is based on the accurate premise that companies legally try to reduce their taxes. Moreover, the Jimmy Buffett music is a nice touch.

Since I’ve share a couple of anti-tax haven videos, I feel compelled to post one of mine for some balance. And since I recently posted my video on the economic case for tax havens, here’s my video on the moral case for tax havens.

And if you want to really understand these issues, I humbly suggest you look at the paper I wrote for the UK-based Adam Smith Institute.

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Another Much-Needed Defense of Tax Competition and Tax Havens by a British Politician

I sometimes make fun of the English, for reasons ranging from asinine laws to milquetoast politicians to horrid healthcare policy.

But at least some U.K. elected officials are willing to stand up for tax competition and fiscal sovereignty by defending low-tax jurisdictions. In previous posts, I’ve applauded Dan Hannan and Godfrey Bloom for great speeches at the European Parliament.

There are also some sensible people in the U.K. Parliament, most notably Mark Field.

Here are some excerpts from an article in the U.K.-based Telegraph.

A conservative MP has spoken out in defence of tax havens and against what he called “a one-sided debate that demonstrates a fundamental lack of understanding of their role in the global financial market”. …In an attempt to balance the “one-sided” debate on international finance centres (IFCs), Mr Field…advised the UK government to think twice before imposing more regulation on these jurisdictions. …In a bid to dismiss the age-old belief that tax havens attract investors purely because of their tax regimes, Mr Field argued that it is a combination of their political stability, familiar legal systems, quality of service, lack of foreign exchange controls, and tax and legal neutrality that make them ideal locations to deposit money.The current financial crisis, he continued, had more to do with poor regulation and mistakes made onshore rather than offshore, and if the EU pressed ahead with its intention to harmonise tax systems across international borders “it could potentially represent the end for healthy tax competition… Tax harmonisation and cooperation, added Mr Field, was simply Brussels-speak for exporting high tax models on continental Europe to low tax jurisdictions.

These issues are just as relevant for the United States, but how many American politicians stand up and defend free markets and jurisdictional competition as a means of restraining the political predators in Washington?

I’m re-posting my video on The Economic Case for Tax Havens below, for those who haven’t seen it. But I also want to call your attention to this chart from the Treasury Department.

You’ll have to click and enlarge it. You’ll see that it shows the amount of capital invested in America from various parts of the world. The “C” category shows that more money is invested in America via Caribbean banking centers such as the Cayman Islands than from any other source.

And this is just one type of foreign investment. As I’ve explained elsewhere, foreigners have more than $10 trillion invested in the U.S. economy, in part because the United States is a tax haven for foreign investors.

So when Obama climbs into bed with the Europeans to push a global network of tax police, he’s pushing policies that ultimately will do great damage to American competitiveness.

Let’s close by returning to the original theme of wise and astute Englishmen. If you want a good defense of tax competition and tax havens, read what Allister Heath wrote last year.

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Obama and Geithner Advising the Europeans on Fiscal Crisis?!? This Is a Case of the Blind Leading the Blind…on Steroids

This is either frightening or hilarious. The people in Washington who are trying to make America more like Europe are advising the Europeans to double-down on the awful policies that have pushed the continent’s welfare states to insolvency.

Here are some of the surreal details from a CNBC report.

Treasury Secretary Timothy Geithner will take the unprecedented step of attending a meeting of EU finance ministers in Poland on Friday. It will be his second trip to Europe in a week after he met his main EU counterparts at a G7 meeting last weekend. Obama said that while Greece is the immediate concern, an even bigger problem is what may happen should markets keep attacking the larger economies of Spain and Italy. “In the end the big countries in Europe, the leaders in Europe must meet and take a decision on how to coordinate monetary integration with more effective co-ordinated fiscal policy,” the news agency EFE quoted him as saying. Geithner is likely to urge euro zone finance ministers on Friday to speed up ratification of changes to their bailout fund and consider boosting its size, an EU source said. …Obama’s comments suggested that Washington is trying to nudge European governments toward closer fiscal union or a bigger bailout fund to recapitalize teetering banks but European politics, especially in Germany, make that difficult.

Your eyes are not deceiving you. Obama and Geithner want more bailouts, which will simply encourage more profligacy. And the President even endorsed more harmonization of economic policy, which will exacerbate the problems in Europe by leading to higher taxes, more spending, and additional regulation.

But you have to give Obama and Geithner credit. They support the same bad policies on both sides of the Atlantic Ocean.

Obama, however, is not fully consistent in his beliefs. During a visit to Africa, he said, “No business wants to invest in a place where government skims 20 percent off the top.” But I guess bigger government is okay in Europe, where the burden of government is already 50 percent of economic output.

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Are Tax Havens Moral or Immoral?

Being the world’s self-appointed defender of so-called tax havens has led to some rather bizarre episodes.

The bureaucrats at the Organization for Economic Cooperation and Development threatened to have me thrown in a Mexican jail for the horrible crime of standing in the public lobby of a hotel and giving advice to low-tax jurisdictions.

On a more amusing note, my efforts to defend tax havens made me the beneficiary of grade inflation and I was listed as the 244th most important person in the world of global  finance – even higher than George Soros and Paul Krugman.

But if that makes it seem as if the battle is full of drama and (exaggerated) glory, that would be a gross exaggeration. More than 99 percent of my time on this issue is consumed by the difficult task of trying to convince policy makers that tax competition, fiscal sovereignty, and financial privacy should be celebrated rather than persecuted.

Sort of like convincing thieves that it’s a good idea for houses to have alarm systems.

And it means I’m also condemned to the never-ending chore of debunking left-wing attacks on tax havens. The big-government crowd viscerally despises these jurisdictions because tax competition threatens the ability of politicians to engage in class warfare/redistribution policies.

Here’s a typical example. Paul Vallely has a column, entitled “There is no moral case for tax havens,” in the UK-based Independent.

To determine whether tax havens are immoral, let’s peruse Mr. Vallely’s column. It begins with an attack on Ugland House in the Cayman Islands.

There is a building in the Cayman Islands that is home to 12,000 corporations. It must be a very big building. Or a very big tax scam.

If lying is immoral, this is a quick black mark on Mr. Vallely rather than tax havens. I’ve already explained, in a post eviscerating an empty-suit Senator from North Dakota, that a company’s home is merely the place where it is chartered for legal purposes. A firm’s legal domicile has nothing to do with where it does business or where it is headquartered.

In other words, there is nothing nefarious about Ugland House, just as there is nothing wrong with the small building in Delaware that is home to more than 200,000 companies. Obama, by the way, demagogued about Ugland House during the 2008 campaign.

Now that we’ve established that the author is a careless and know-nothing hack, let’s see what else he has to say.

Are there any legitimate reasons why anyone would want to have a secret bank account – and pay a premium to maintain their anonymity – or move their money to one of the pink dots on the map which are the final remnants of the British empire: the Caymans, Bermuda, the Turks and Caicos and the British Virgin Islands?

Actually, there are lots of people who have very compelling reasons to keep their money in havens, and only a tiny minority of them are escaping onerous tax burdens.What about:

o Jews in North Africa and the Middle East?

o Persecuted ethnic Chinese in Indonesia and the Philippines?

o Political dissidents in places such as Russia and Venezuela?

o Entrepreneurs in thug regimes such as Venezuela and Zimbabwe?

o Families threatened by kidnapping failed states such as Mexico?

o Homosexuals in murderous regimes such as Iran?

As this video explains, there are billions of people around the world that are subject to state-sanctioned (or at least state-permitted) religious, ethnic, racial, political, sexual, and economic persecution. These people are especially likely to be targeted if they have any money, so the ability to invest their assets offshore and keep that information hidden from venal governments can, in some cases, be a life-or-death matter.

And let’s not forget the residents of failed states, where crime, expropriation, kidnapping, corruption, extortion, and economic mismanagement are ubiquitous. These people also need havens where they can safely and confidentially invest their money.

The author of the column is probably oblivious to these practical, real-world concerns. Instead, he is content with sweeping proclamations.

The moral case against is clear enough. Tax havens epitomise unfairness, cheating and injustice. .

But if he is against unfairness, cheating, and injustice, why does he want to empower the institution – government – that is the source of oppression in the world?

To be fair, our left-wing friend does attempt to address the other side of the argument.

Apologists insist that tax havens protect individual liberty. They promote the accumulation of capital, fair competition between nations and better tax law elsewhere in the world. They also foster economic growth. …Yet even if all that were true – and it is not – does it outweigh the ethical harm they do? The numbered bank accounts of tax havens are notoriously sanctuaries for the spoils of theft, fraud, bribery, terrorism, drug-dealing, illegal betting, money-laundering and plunder by Arab despots such as Gaddafi, Mubarak and Ben Ali, all of whom had Swiss accounts frozen.

But he can’t resist trying to discredit the economic argument by resorting to more demagoguery, asserting that tax havens are shadowy regimes. Not surprisingly, he offers no supporting data. Moreover, you won’t be surprised to learn that the real-world evidence directly contradicts what he wrote. The most comprehensive analysis of dirty money finds 28 problem jurisdictions, and only one could be considered a tax haven.

Last but not least, the author addresses the issue that really motivates the left – the potential loss of access to other people’s money, funds that they want the government to confiscate and redistribute.

Christian Aid reckons that tax dodging costs developing countries at least $160bn a year – far more than they receive in aid. The US research centre Integrity estimated that more than $1.2trn drained out of poor countries illicitly in 2008 alone. …Some say an attack on tax havens is an attack on wealth creation. It is no such thing. It is a demand for the good functioning of capitalism, balancing the demands of efficiency and of justice, and placing a value on social harmony.

There are several problems with this passage, including the (perhaps deliberate) mixing of tax evasion and tax avoidance. But the key point is that the burden of government spending in most nations is now at record levels, undermining prosperity and reducing growth. Why should add more fuel to the fire by giving politicians even more money to waste?

Let’s now shift from the inaccurate ramblings of a left-winger to some real-world evidence. The Wall Street Journal has an article on the Canton of Zug, Switzerland’s tax haven within a tax haven. This hopefully won’t surprise anyone, but low-tax policies have been very beneficial for Zug.

Developed nations from Japan to America are desperate for growth, but this tiny lake-filled Swiss canton is wrestling with a different problem: too much of it. Zug’s history of rock-bottom tax rates, for individuals and corporations alike, has brought it an A-list of multinational businesses. Luxury shops abound, government coffers are flush, and there are so many jobs that employers sometimes have a hard time finding people to fill them. …If Switzerland is the world’s most famous tax haven, Zug amounts to a haven within a haven.

Here’s some of the evidence of how better fiscal policy promotes prosperity. This is economic data, to be sure, but isn’t the choice between growth and stagnation also a moral issue?

Zug long was a poor farming region, but in 1947 its leaders began to trim tax rates in an effort to attract companies and the well-heeled. In Switzerland, two-thirds of total taxes, including individual and corporate income taxes, are levied by the cantons, not the central government. The cantons also wield other powers that enable them compete for business, such as the authority to make residency and building permits easy to get. …businesses moved in, many establishing regional headquarters. Over the past decade, the number of companies with operations of some sort in the canton jumped to 30,000 from 19,000. The number of jobs in Zug rose 20% in six years, driven by the economic boom and foreign companies’ efforts to minimize their taxes. At a time when the unemployment rate in the European Union (to which Switzerland doesn’t belong) is 9.4%, Zug’s is 1.9%.

It turns out that Zug is growing so fast that lawmakers actually want to discourage more investment. What a nice problem to have.

Describing Zug’s development as “astonishing,” Matthias Michel, the head of the canton government, said, “We are too small for the success we have had.” …Zug has largely stopped trying to lure more multinationals, according to Mr. Michel.

Its worth pointing out that the residents of Zug are not some sort of anomaly. The rest of Switzerland is filled with people who recognize the value of limited government.

…the Swiss are mostly holding fast to their fiscal beliefs. Last November, in a national referendum, they overwhelmingly rejected a proposal that would have established a minimum 22% tax rate on incomes over 250,000 francs, or about $315,000.

Sadly, even though the world is filled with evidence that smaller government is good for prosperity (and even more evidence that big government is bad for growth), statism is not abating.

Indeed, the left’s anti-tax haven campaign continues to gain steam. At a recent OECD meeting, high-tax nations (with the support of the Obama Administration) put in place a bureaucratic monstrosity that is likely to become a world tax organization.

This global tax cartel will be akin to an OPEC for politicians, and the impact on taxpayers will be quite similar to the impact of the real OPEC on motorists.

If that’s a moral outcome, then I want to be a hedonist.

To conclude, here are two other videos on tax havens. This one looks at the economic issues.

And here’s a video debunking some of the usual attacks on low-tax jurisdictions.

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When Germany and France Both Agree on Something, You Can Safely Assume It Is a Terrible Idea

I’ve joked on many occasions that bipartisanship occurs in Washington when the evil party and the stupid party come up with an idea that is simultaneously malicious and misguided.

The international version of two-wrongs-don’t-make-a-right occurs whenever the French and the Germans conspire on economic policy. The latest example is a joint proposal for “economic governance” for eurozone nations. Here are some blurbs from the BBC’s report.

The French and German leaders have called for “true economic governance” for the eurozone in response to the euro debt crisis. Speaking at a joint news conference, German Chancellor Angela Merkel and French President Nicolas Sarkozy urged much closer economic and fiscal policy in the eurozone. …They also advocated a tax on financial transactions to raise more revenues.

I don’t pretend to have any predictive ability, but I’ll bet dollars-to-donuts that “true economic governance” will lead to more spending and higher taxes. Why? Because “economic governance” is just a sanitized way of describing a cartel of governments.

When politicians don’t have to worry as much about jobs and capital migrating to jurisdictions with less oppressive tax law, they will behave in a predictable fashion by raising tax rates. In other words, the weakening of tax competition is a recipe for bigger, more expensive government.

Indeed, the tax on financial transactions is a perfect example. Any one nation would be unlikely to impose this perverse levy for fear of losing business to neighbors. But if there’s a one-size-fits-all eurozone government, then bad policy becomes more feasible.

The only good news is that Merkel hasn’t totally lost her mind. Perhaps because her de facto socialist party is not doing well in the polls against the de jure socialist party in Germany, she is temporarily resisting the idea of “eurobonds.”

Ms Merkel again played down the chances of introducing “eurobonds” – jointly guaranteed debts of the 17 eurozone governments – as a solution to the crisis. The idea has been advocated by the Italian finance minister, Giulio Tremonti, as well as billionaire investor George Soros as a way of providing cheap financing to struggling governments while also incentivising them to put their finances in order.

The more profligate European governments like eurobonds for the same reason that California and Illinois would like to jointly issue debt with Texas. It’s a way for the spendthrift to free ride off the frugal.

And speculators like eurobonds because their holdings can dramatically rise in value when downside risk gets transferred to taxpayers (nothing wrong with speculation, by the way, so long as losses aren’t socialized).

Eurobonds might temporarily calm European markets, but only by setting the stage for a bigger collapse in the near future when the Germans are pulled underwater by their reckless neighbors.

For those who want more information, this video is a primer on the importance of jurisdictional competition.

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The Clown Prince of Europe

If Jimmy Carter and Barack Obama are neck-and-neck competitors in the contest to be the public face of incompetent statism in America, then the competition in Europe is between Herman van Rompuy and Olga Stefou.

But since I’ve already crowned Ms. Stefou as the Queen of Greece, then Mr Rompuy (a.k.a., President of the Euorpean Council) is the winner by default.

And “winner by default” is a pretty good description of this statist paper pusher. I’ve previously mocked this über-bureaucrat for:

a)whining about markets downgrading Europe’s welfare states,

b) crying about whether he gets prestigious seating at bureaucratic meetings,

c) seeking to impose one-size-fits-all big government on EU nations with “economic governance,” and

d) publishing an anthology of haiku poems (this last has nothing to do with economic policy, but I can’t resist including it on the list).

Even though he has this impressive list of accomplishments,  Mr. Rompuy is not taking any chances. To cement his place in history, he is overseeing a series of disastrous bailouts and then ineffectually complaining that markets are unimpressed by his willingness to throw good money after bad. Here’s a blurb from an article in the EU Observer.

Van Rompuy, who brokered the eurozone deal on Greece, precipitated by the very same rising costs as for the Italian government, has tried to allay market fears in an op-ed published in several European newspapers. “Astonishingly,” he writes, “since our summit the cost of borrowing has increased again for a number of euro area countries. I say astonishingly, because all macro economic fundamentals point in the opposite direction.” The Greek bailout conditions are “exceptional” and mark no precedent for other countries, he added. Citing the austerity measures adopted in Italy and Spain, as well as Madrid’s low debt, Van Rompuy accused the markets of making risk assessments “totally out of line with the fundamentals.” Ratings agencies which downgraded the two countries also acted in a “ludicrous” way when putting them in the top tier of default risk countries, he claimed.

Let’s recap: The fiscal collapse of Europe is proceeding in a predictable fashion, as excessive spending and high tax rates are strangling growth and pushing red ink to unsustainable levels.

And Mr. Rompuy thinks the answer is more spending, higher taxes, and additional debt. And then this clown has the nerve to complain that markets are giving a thumbs-down. Amazing.

Even more astounding, or perhaps even more discouraging, President Obama wants America to travel down the same path.

But that’s a story for another day. Let’s close this post by looking at a couple of amusing videos, featuring the head of the UK Independence Party raking Mr. Rompuy over the coals.

I think the word “skewer” is somehow appropriate.

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With the Support of the Obama Administration, Paris-Based OECD Now Wants De Facto World Tax Organization as Part of its Anti-Tax Competition Campaign

I’ve been battling the Organization for Economic Cooperation for years, ever since the Paris-based bureaucracy unveiled its “harmful tax competition” project in the late 1990s. Controlled by Europe’s high-tax welfare states, the OECD wants to prop up the fiscal systems of nations such as Greece and France by hindering the flow of jobs and capital to low-tax jurisdictions.

Guided by a radical theory known as Capital Export Neutrality, the OECD wants to impose global tax rules that would prevent taxpayers from ever having the ability to benefit from better tax law in other jurisdictions. This is why, for instance, the international bureaucrats are anxious to undermine national tax laws – such as America’s favorable treatment of bank deposits from overseas – that enable foreigners to escape onerous tax regimes.

Bolstered by support from the Obama Administration, the OECD now is taking its campaign to the next level. At its Global Tax Forum in Bermuda, which ends later today, the bureaucrats unveiled a new scheme that effectively would result in the creation of something akin to a World Tax Organization.

The vehicle for this effort is a Multilateral Convention on Mutual Administrative Assistance in Tax Matters. This may sound dry and technical, but the OECD wants all nations to participate in this pact, which has existed for a couple of decades but was radically expanded last year to give high-tax governments sweeping new powers to impose bad tax law on income generated in low-tax jurisdictions.

But the real smoking gun is that the OECD has put itself in charge of a “co-ordinating body” that will have enormous powers to interpret the agreement, modify the pact, and resolve disputes – thus giving itself the ability to serve as judge, jury, and executioner.

This is a profoundly dangerous development with all sorts of very troubling implications. Since I’m in Bermuda trying to destabilize this effort, I don’t have time for extensive analysis, but here’s a press release from the Center for Freedom and Prosperity and here are some of my immediate concerns.

1. Higher tax burdens. If high-tax governments succeed is imposing this Multilateral Convention (insert “World Tax Organization” whenever you see that term), tax competition will be undermined and politicians will respond by increasing tax burdens. This is why nations such as France have been pushing this scheme, of course, and why left-wing academics have long dreamed of this type of arrangement.

2. Risk to human rights. Amazingly, the Multilateral Convention is open to repressive regimes, which then would have access to all sorts of sensitive and confidential taxpayer information. Already, the thuggish dictatorship of Azerbaijan has signed up, as well as the unstable nation of Moldova and the corrupt government of Mexico. The implications are grim, including the sale of private data to criminal gangs, the loss of sensitive information to hackers, and the direct misuse of American tax returns.

3. Loss of sovereignty. For all intents and purposes, the Multilateral Convention outlaws certain pro-growth tax policies and discourages others. Equally worrisome, it creates a system allowing foreign tax collectors to cross borders. The Obama Administration has specifically acquiesced to this provision, so perhaps we will soon see corrupt Mexican tax authorities harassing businesses and individuals on American soil.

4. Outlawing tax avoidance. The OECD historically has tried to portray its efforts as a fight against tax evasion, but the Multilateral Convention explicitly talks about “combating tax avoidance.” This should not be a surprise since the Capital Export Neutrality ideology is based on the notion that taxpayers should have zero ability to lower their tax burdens. This means we can fully expect an assault on all forms of tax planning, with American companies almost sure to be among the first to be in the OECD’s crosshairs.

The final insult to injury is that American taxpayers are the biggest funders of the OECD, providing nearly one-fourth of the bureaucracy’s bloated budget. So our tax dollars are being used by OECD bureaucrats (who receive tax-free salaries!) to dream up new ways of increasing our tax burdens. In case you need any additional reasons to despise this bureaucracy, here’s a video detailing its anti-free market activities.

And since I’m recycling some videos, here’s one explaining why tax competition is so important.

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Jeffrey Sachs and the Fictional “Race to the Bottom” Caused by Tax Competition

Jeffrey Sachs of Columbia University is a big booster of the discredited notion that foreign aid is a cure-all for poverty in the developing world, but he is now branching out and saying silly things about policy in other areas.

In a column for the Financial Times, he complains that tax competition is forcing governments to “race to the bottom” with regards to tax rates. The answer, he wants us to believe, is some sort of global tax cartel. Sort of an “OPEC for politicians” that will facilitate the imposition of higher tax rates.

Only international co-operation can now solve what is becoming a runaway social crisis in many high-income countries. …With capital globally mobile, moreover, governments are now in a race to the bottom with regard to corporate taxation and loopholes for personal taxation of high incomes. Each government aims to attract mobile capital by cutting taxes relative to others. …countries cannot act by themselves. Even the social democracies of northern Europe, with their balanced budgets and high tax rates, are increasingly being pulled into the vortex of tax cutting and the race to the bottom. …recent trends…require increased, not decreased, taxation of higher incomes, including corporate profits; and that tax and regulatory co-ordination across countries are vital to prevent a ruinous fiscal race to the bottom.

If this overwrought rhetoric is true, it would mean that governments have been starved of revenue because of race-to-the-bottom tax cuts for evil corporations and sinister rich people. Well, it is true that tax competition over the past 30-plus years has resulted in lower tax rates. But do lower tax rates mean less tax revenue, as implied by Sachs’ analysis?

At the risk of being impolite and shattering anyone’s illusions, let’s actually see what happened to the overall tax burden on both personal and corporate income.

This chart, showing the average for industrialized nations, shows that Sachs and his ilk are wrong. Way wrong. Tax rates have come down, but the overall tax burden actually has increased. So while there may be a race to less-destructive tax rates, there certainly isn’t a race to bottom for tax revenue.

Hmmm….lower tax rates and higher tax revenue. That seems vaguely familiar. Maybe it has something to do with “supply-side economics.” One can only wonder if Sachs has heard about that strange idea known as the Laffer Curve.

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British Business Writer Explains: Thanks to Tax Competition and Tax Havens, the Greed of the Political Class Is Being Constrained

Regular readers know that I’m a big fan of tax competition because politicians are less likely to misbehave if the potential victims of plunder have the ability to escape across borders.

Here is an excerpt from a superb article by Allister Heath, one of the U.K.’s best writers on economic and business issues.

In a modern, global and open world, states have to compete for people. Weirdly, that is something that a large number of commentators have failed to recognise… They assume implicitly that governments remain quasi-monopolies, as was the case throughout most of human history, with citizens mere subjects forced to put up with poor public services, high taxes, crime, misgovernment and a poor quality of life. Yet the reality is that there is now more competition than ever between governments for human capital, with people – especially the highly skilled and the successful – more footloose and mobile than ever before. This is true both within the EU, where freedom of movement reins, and globally. …competition between governments is as good for individuals as competition between firms is for consumers. It keeps down tax rates, especially on labour and capital, which is good for growth and job creation; states need to produce better services at the cheapest possible cost. And if governments become too irritating or incompetent, it allows an exit strategy. It is strange how pundits who claim to want greater competition in the domestic economy – for example, in banking – are so afraid of competition for people between states, decrying it as a race to the bottom. Yet monopolies are always bad, in every sphere of human endeavour, breeding complacency, curtailing innovation and throttling progress. …Globalisation is not just about buying cheap Chinese goods: it also limits the state’s powers to over-tax or over-control its citizens.

For those who haven’t seen them before, here are a couple of my videos that elaborate on these critical issues.

First, here’s a video on tax competition, which includes some well-deserved criticism of international bureaucracies and high-tax nations that are seeking to create global tax cartels.

Here’s a video that makes a powerful economic case for tax havens.

But this is not just an economic issue. Here’s a video that addresses the moral issues and explains why tax havens play a critical role in protecting people subject to persecution by venal governments – as well as people living in nations plagued by crime and instability.

And last but not least, this video punctures some of the myths promoted by the anti-tax haven advocates of global tax cartels.

By the way, since the main purpose of this post is to draw your attention to the superb analysis of a British writer, I may as well close by drawing your attention to a couple of speeches by Dan Hannan, a British member of the European Parliament. In a remarkably limited time, he explains what this battle is all about.

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New Video Explains that Tax Competition Is a Powerful Mechanism to Restrain the Greed of the Political Class

Here’s a new mini-documentary from the Center for Freedom and Prosperity, narrated by Natasha Montague of Americans for Tax Reform, that explains why the process of tax competition is a critical constraint on the propensity of governments to over-tax and over-spend.

The issue is very simple. When labor and capital have the ability to escape bad policy by moving across borders, politicians are more likely to realize that it is foolish to impose high tax rates. And they oftentimes compete for jobs and investment by lowering tax rates. This virtuous form of rivalry helps explain why so many nations in recent years have lowered tax rates and adopted simple and fair flat tax systems.

Another great feature of the video is the series of quotes from winners of the Nobel Prize. These economists all recognize competition between governments is just as desirable as competition between banks, pet stores, and supermarkets.

The video also discusses how politicians are attacking tax competition. It mentions a privacy-eroding scheme concocted by governors to tax out-of-state purchases (how dare consumers buy online and avoid state sales tax!).

And it also discusses a very destructive tax harmonization effort by a Paris-based bureaucracy (the Organization for Economic Cooperation and Development, subsidized with American tax dollars!), which would undermine fiscal sovereignty by punishing jurisdictions that adopt pro-growth tax systems that attract labor and capital.

The issues discussed in this video generally don’t get a lot of attention, but they are critical for the long-run battle to restrain government. Please share widely.

P.S. This speech by Florida’s new Governor is a good example of how tax competition encourages governments to do the right thing.

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Greetings from San Marino

Hello from the Most Serene Republic of San Marino, a 24-square mile enclave centered around Monte Titano in eastern Italy. I’m here for a conference on “Competition and Alliances among States.”

Like many other so-called tax havens, San Marino has been bludgeoned in recent years by politicians from high-tax nations, who resent the flow of jobs and capital to low-tax jurisdictions. This is creating problems for the economy, which is one of the most prosperous in the world.

I will speak later today about the ongoing battle between those who favor tax competition and those who want tax harmonization. Not surprisingly, my presentation will include some jabs at France, Germany, and other high-tax nations, as well as statist international bureaucracies such as the Organization for Economic Cooperation and Development.

But my main goal will be to put this battle in context, pointing out that the attacks against low-tax jurisdictions will get more intense in the future as welfare states begin to fall apart and politicians desperately search for more revenue to delay the day of reckoning.

This is not to imply that San Marino is a laissez-faire paradise. Yes, comparatively low tax rates have generated prosperity, but prosperity generates a lot of tax revenue (the Laffer Curve strikes again!), and the nation’s politicians have succumbed to temptation and spent all the money. Indeed, there is not much difference between the welfare state in San Marino and the one in Italy.

The moral of the story, of course, is that all nations should strive to shrink the overall burden of government. San Marino should try to be more like Hong Kong and less like France. The same is true for the United States.

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English Anti-Tax Haven Ideologues Are Just as Foolish and Ignorant as their American Cousins

There’s a supposed expose in the U.K.-based Daily Mail about how major British companies have subsidiaries in low-tax jurisdictions. It even includes this table with the ostensibly shocking numbers.

This is quite akin to the propaganda issued by American statists. Here’s a table from a report issued by a left-wing group that calls itself “Business and Investors Against Tax Haven Abuse.”

At the risk of being impolite, I’ll ask the appropriate rhetorical question: What do these tables mean?

Are the leftists upset that multinational companies exist? If so, there’s really no point in having a discussion.

Are they angry that these firms are legally trying to minimize tax? If so, they must not understand that management has a fiduciary obligation to maximize after-tax returns for shareholders.

Are they implying that these businesses are cheating on their tax returns? If so, they clearly do not understand the difference between tax avoidance and tax evasion.

Are they agitating for governments to impose worldwide taxation so that companies are double-taxed on any income earned (and already subject to tax) in other jurisdictions? If so, they should forthrightly admit this is their goal, notwithstanding the destructive, anti-competitive impact of such a policy.

Or, perhaps, could it be the case that leftists on both sides of the Atlantic don’t like tax competition? But rather than openly argue for tax harmonization and other policies that would lead to higher taxes and a loss of fiscal sovereignty, they think they will have more luck expanding the power of government by employing demagoguery against the big, bad, multinational companies and small, low-tax jurisdictions.

To give these statists credit, they are being smart. Tax competition almost certainly is the biggest impediment that now exists to restrain big government. Greedy politicians understand that high taxes may simply lead the geese with the golden eggs to fly across the border. Indeed, competition between governments is surely the main reason that tax rates have dropped so dramatically in the past 30 years. This video explains.

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If We Value Liberty and Prosperity, We Better Defend Tax Competition and Fight for Fiscal Sovereignty

Regular readers know that I am a tireless advocate for tax competition, which exists when governments are encouraged to adopt better tax policy in order to attract/retain jobs and investment. In other words, I want governments to compete with each other because that leads to better policy, just as we get better results as consumers when banks, pet stores, hairdressers, and grocery stores compete with each other.

There is powerful evidence that tax competition has generated very good results in the past 30 years. Top personal income tax rates averaged more than 67 percent back in 1980, but thanks in large part to tax competition, the average top tax rate on individuals has fallen to about 41 percent. Corporate tax rates also have dropped dramatically, from an average of around 48 percent (this data is not as easy to pin down) in 1980 to 25 percent today. And we now have more than 30 flat tax nations today, compared to just 3 in 1980.

That’s the good news. The bad news is that greedy politicians don’t like being constrained by tax competition. Politicians didn’t lower tax rates because they wanted to. They only made their tax systems better because they were afraid that jobs and investment would escape to lower-tax jurisdictions. They resent the fact that tax competition makes it hard to engage in class-warfare tax policy.

That’s why many of these politicians are seeking to replace tax competition with some sort of tax cartel. They want to impose rules on the entire world that will make it hard for taxpayers to benefit from better tax policy in another jurisdiction. In effect, they want some form of tax harmonization, which would create an “OPEC for politicians.” And just as the real OPEC extracts more money from energy consumers, a tax cartel would grab more money from taxpayers.

One aspect of this battle is the way proponents of higher taxes try to demonize so-called tax havens. Many of these jurisdictions are very small, but the smart ones nonetheless defend themselves against the attacks coming from the world’s major welfare states. Here’s a good example. Tony Travers of Cayman Finance, the association representing the financial services industry in the Cayman Islands, recently spoke about the left’s campaign against low-tax jurisdictions.

Travers said he believed the widespread negativity was part of well organised and powerful public relations campaigns driven by onshore Treasury, and supranational and domestic regulatory bodies. British politicians such as Emma Reynolds and former Prime Minister Gordon Brown and even US President Barack Obama were, he said, examples of politicians that were “blame deflecting … and anxious to obfuscate the failures of their domestic regulatory systems … by suggesting that in some way it is the tax or regulatory system of the offshore financial centre that is at fault.” He claimed the problems they were trying to conceal by their demonisation of offshore centres had their source onshore. He described various socialist activist movements, such as the trade unions, major charities such as Oxfam, and Travers arch nemesis, Richard Murphy of the Tax Justice Network as the “Tax Taliban” .

This fight is occurring at all levels. A new scholarly study from the Instituto Bruno Leoni in Italy digs into the academic debate about tax competition. Written by Dalibor Rohác of London’s Legatum Institute, the report debunks the argument that tax competition somehow is economically inefficient.

The first common argument is that tax competition distorts the allocation of mobile factors of production across countries. The second argument recurrent in the literature says that tax competition can reduce tax revenue and endanger the stability of public finances. The troublesome feature of both of these arguments is that they start from the assumption of government benevolence and omniscience. For instance, the first argument presupposes that the initial allocation of capital between the two countries was optimal and that tax competition is driving it away from the optimum. Likewise, the second argument implicitly assumes that the initial amount raised in taxes corresponded to some well-defined social optimum and therefore that tax competition drives revenue below that optimal level. Hence neither of these arguments holds in the light of basic public choice theory which convincingly demonstrates that governments do have a tendency to overspend and overtax.

Rohác cleverly exposes the other side’s statist agenda. He explains that their main argument is based on the idea that different tax rates in different nations will lead to an inefficient allocation of investment. He then points out that there is a pro-growth way and an anti-growth way of dealing with this supposed problem.

…if the problem of capital misallocation is caused by differences in tax rates among countries, than introducing a maximal rate is a solution that would be equally appropriate. …tax competition might well offer a solution to the alleged problem of misallocation of capital caused by tax differentials. If tax competition was a “race to the bottom,” then the final outcome would actually be a tax rate harmonized across countries and harmonized at a rate of zero per cent, thus eliminating capital tax distortions altogether.

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Halfway Around the World, Fighting for Freedom, Low Taxes, and Sovereignty

I’m in Singapore for two days to help fight the Organization for Economic Cooperation and Development, a statist international bureaucracy based in Paris. The OECD has something called a global tax forum, the purpose of which is to harass so-called tax haven in hopes of coercing them into acting as tax collectors for Europe’s decrepit welfare states. Here’s the executive summary from the memo I wrote, which warns low-tax jurisdictions that the OECD may push even harder to undermine fiscal sovereignty because of fears that a GOP takeover of Congress will make it more difficult to push for tax harmonization policies in the future.

The Paris-based Organization for Economic Cooperation and Development has an ongoing project to prop up Europe’s inefficient welfare states by attacking tax competition in hopes of enabling governments to impose heavier tax burdens. This project received a boost when the Obama Administration joined forces with countries such as France and Germany, but the tide is now turning against high-tax nations – particularly as more people understand that such an approach inevitably leads to Greek-style fiscal collapse. Looming political changes in the United States will further complicate the OECD’s ability to impose bad policy. Because of these developments, low-tax jurisdictions should be especially wary of schemes to rush through new anti-tax competition initiatives at the Singapore Global Forum.

The good news is that nothing dramatic took place on the first day of the two-day conference. the OECD continued to bully low-tax jurisdictions to sign information-sharing agreements and the low-tax jurisdictions kept asking for double-taxation agreements so they could get some benefit in exchange for weakening their human rights/financial privacy laws. The OECD and high-tax nations have been ignoring these requests for a two-way street, thus continuing their bad-faith behavior.

For more information on this issue, here’s a link to my video on tax competition, and here are a handful of TV appearances where I discuss the issue. This is a challenging issue to debate, so I’d welcome feedback on which arguments you think are most effective.

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Crocodile Dundee vs Australia’s Tax Police

Here’s a Reuters story about the Australian Tax Office harassing Paul Hogan, better known to Americans as Crocodile Dundee, because of a tax dispute. The grinches at the tax office took advantage of Hogan’s return for his mother’s funeral to hold him hostage, refusing to let him leave the country until he coughs up some cash. It appears that the tax police in Australia are just as politicized and above the law as the IRS. Hogan has never been charged with tax evasion and there are plenty of signs that the bureaucrats want to make him a high-profile victim to justify the amount of money that has been squandered in a probe of supposed offshore evasion.

Actor Paul Hogan, star of the “Crocodile Dundee” movies, has vowed to continue fighting the Australian tax office which has barred him from leaving Australia until he pays a massive bill, saying he’s victim of a witch hunt. Hogan, 70, was served with a departure prohibition order 10 days ago while in Australia to attend his 101-year-old mother’s funeral which has prevented him from leaving to return to Los Angeles where he lives with his wife and son. The Australian Tax Office refused to comment on reports of seeking tax on A$38 million ($34 million) of allegedly undeclared income from Hogan, saying it cannot give details of individual taxpayers. But the actor went public in the Australian media this week to put forward his side in his five-year row with the tax office, saying he had done nothing wrong and the tax office was on a witch hunt for a high-profile case. …”If I was a tax evader, which I’m not, I must be the dumbest one in the world to keep coming back here instead of fleeing to a tax haven … I know they’re absolutely desperate to nail some high-profile character with money to justify the expense to the taxpayer.” Hogan, who was once a painter on the Sydney Harbour Bridge, is under investigation as part of Australia’s biggest probe into offshore tax evasion, Operation Wickenby. The operation is budgeted to cost at least $300 million. The tax office has claimed he put tens of millions of dollars in film royalties in offshore tax havens, a claim that he has denied. He has never been charged with tax evasion.

This story is symbolic of a bigger issue, which is the the unfortunate tendency of governments to create ever-more oppressive and misguided laws in response to failures of existing policy. We see this in the failed War on Drugs, which leads to trampling of civil liberties and erosion of privacy. We see it in the failed War on Poverty, which leads to more redistribution that further traps people in dependency. We see it in the failed government-run education system, which wastes more money every year as outcomes remain stagnant and children from poor and minority communities suffer.
 
In the case of tax policy, politicians impose high tax rates and punitive forms of double taxation. As anybody with a modicum of common sense could predict, this bad tax policy undermines economic performance and drives economic activity to jurisdictions with better tax law. The politicians then have two ways to respond. They can lower tax rates and reform tax systems, an approach that simultaneously would boost growth and improve compliance. Or they can tighten the thumbscrews on taxpayers, trample their rights, and conspire with other high-tax nations to punish the jurisdictions that do have good policy.
 
Not surprisingly, most politicians choose the latter approach. And the attack on low-tax jurisdictions is a particularly loathsome part of their response. As this video explains, tax competition is a liberalizing force in the world economy and the effort by high-tax nations to penalize so-called tax havens is driven by a statist impulse to prop up decrepit and inefficient welfare states.

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I’m More Important than Paul Krugman and George Soros

Actually, I wish that were true. But I’m slightly amused to see that I’m ranked as the 244th most-influential person in the world of global finance according to the FCI500 Index put together by Financial Centres International. George Soros ranks 262 and Paul Krugman is way down at 407. I don’t actually deal with money, of course. My role in this field is to fight for tax competition, largely by seeking to derail the tax harmonization schemes of international bureaucracies such as the Organization for Economic Cooperation and Development, European Commission, and United Nations. Here are the top 10 and three other people you will recognize.

1 Mario Draghi - Governor Banca d’Italia
2 Timothy Geithner – Secretary of the Treasury US Department of the Treasury
3 Barney Frank – Congressman United States House of Representatives
4 Dominique Strauss-Kahn – Managing Director International Monetary Fund
5 Josef Ackermann – Chairman of the Management Board and the Group Executive Committee Deutsche Bank AG
6 Nout Wellink - President De Nederlandsche Bank
7 Zhou Xiaochuan- Governor People’s Bank of China
8 Michel Barnier – Commissioner for the Internal Market and Services European Commission
9 Jean-Claude Trichet – President European Central Bank
10 Stefan Walter – Secretary General Basel Committee on Banking Supervision
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244 Daniel J. Mitchell – Senior Fellow The Cato Institute
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262 George Soros – Hedge Fund Manager Quantum Mutual Funds.
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407 Paul Krugman – Columnist and Economist New York Times

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